Reconstitution of a
partnership firm:-Retirement or Death of a partner
*A
Partner has the right to retire from the firm after giving due notice in
advance.
A new
partnership comes into existence between the remaining partners.
*A
retiring partner is entitled to get the following:
1) Share
in goodwill; Goodwill of the firm is valued and the retiring partners
share of goodwill is credited to his capital account.
2) Share
in Reserves: Reserves are the undistributed profits and it is also
credited to the capital account of retiring partner.
3) Share
in revaluation of assets and liabilities: Assets and liabilities are
revalued on the date of retirement and retiring partner’s share of profit is
credited or the loss is debited to his capital account.
*Accounting
problems:
1) Calculation
of new profit sharing ratio and gaining ratio of the continuing partners.
2) Treatment
of goodwill.
3) Accounting
treatment for revaluation of assets and liabilities.
4) Accounting
treatment of reserves, accumulated profits and losses.
5) Accounting
treatment of joint life policy.
6) Payment
to retiring partner.
7) Adjustment
of capitals in proportion to profit sharing ratios.
*Calculation
of new profit sharing ratio:
.1) If the new profit
sharing ratios of the remaining partners are not given in the question ,it will
be assumed that the remaining partners continue to share profits and losses in
the old ratio.
2) Sometimes the remaining partners purchase the share of
retiring partner in some specified proportion .In such cases the fraction of shares
purchased by them is added to their old share and the new ratio is calculated
as follows:-
New
ratio = old ratio + gain
*Calculation
of Gaining Ratio:
-
Meaning of Gaining Ratio: Gaining ratio is the ratio in which the
remaining partners will pay the amount of goodwill to the retiring partners.
-
Calculation of Gaining Ratio:
1) If
the new profits sharing ratios of the remaining partners are not given in the question,
it will be assumed that the remaining partners continue to gain in the old
ratio.
2) If
the new profit sharing ratio of the remaining partners is given in the
question, gaining ratio is calculated by deducting old ratio from the new
ratio.
Gaining Ratio = New Ratio – Old Ratio
*Difference between
sacrificing Ratio and Gaining Ratio:
Basis
|
Sacrificing Ratio
|
Gaining Ratio
|
1) Meaning:
|
The ratio in which the old
partners surrender a part of their share in favour of a new partner.
|
The ratio in which the remaining
partner’s acquire the outgoing partners share.
|
2)When calculated
|
Calculated at the time of the
admission of a new partner.
|
Calculated at the time of the
retirement or death of a partner.
|
3)Formula for calculation
|
Sacrificing Ratio=Old Ratio-New
Ratio
|
Gaining Ratio=New Ratio-Old Ratio
|
4) Purpose
|
New partners share of goodwill is
divided between the old partners in sacrificing ratio.
|
Goodwill paid to retiring partner
is paid by the remaining partners in their gaining ratio.
|
*Accounting Treatment of Goodwill:
1)
Remaining partner’s capital A/c Dr. (In
gaining ratio)
To Retiring/Deceased partner’s
capital A/c ( with his share of
goodwill)
2) When the
goodwill A/c is already appearing in the books:
i)
All partner’s capital A/c Dr.( in old
ratio )
To Goodwill A/c (goodwill existing in the books)
ii)
Remaining partner’s capital A/c Dr. (in the gaining ratio)
To Retiring/Deceased partner’s capital A/c
*Adjustment
of Accumulated profits and reserves:
1) For
distributing reserves and accumulated profits-
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit and loss A/c (cr.) Dr.
To All partners capital or current A/c
(in old ratio)
2) For
distributing accumulated losses:
All partner’s
capital or current A/c Dr. (in
old ratio)
To Profit and loss A/c
3) For
distributing surplus of specific funds:
Workmen
compensation fund A/c Dr.
Investment fluctuation fund A/c
Dr.
To All partner’s capital or current A/c
(in old ratio)
*Adjustment
of joint life policy on retirement of a
partner:
1) when premium paid has been
considered as revenue expenditure:
- Joint life policy A/c
Dr. (surrender value on the date of
retirement)
To All partner’s capital
A/c (in old ratio)
2) when remaining partners decide not to show Joint life policy in books:
Remaining
partner’s capital A/c Dr. (in new profit sharing ratio)
To Joint life
policy A/c
3) when premium paid has been
considered as capital expenditure: No
further treatment required
if remaining partners decide not to show Joint life policy in books-
Remaining partner’s capital A/c
(in new ratio)
To Joint life policy A/c
Payment to
retiring partner
a) If the amount is paid in
cash or by cheque to retiring partner:
Retiring
partner’s capital A/c Dr.
To cash/Bank A/c (His share paid off)
b)
If the amount is not paid in cash, the amount due to
him will be transferred to his loan A/c:
Retiring partner’s capital A/c Dr.
To Retiring partner’s loan A/c
* Death
of a partner :
On the
death of a partner, the amount payable to him is to be paid to his legal
representatives
Ø
following amounts will be his capital account:
1)
The amount standing to the credit of his capital A/c.
2)
His share of the increase in the value of goodwill of
the firm.
3)
Interest on capital, if provided in the partnership deed.
4)
His share of profit on the revaluation of assets and
liabilities.
5)
His share of undistributed profits or reserves.
6)
His share of life policy.
7)
His share of profit upto the date of his death.
Ø
Following amounts will be debited to the account of the deceased
partner for ascertaining the amount due to his legal representatives:
1)
Drawings.
2) Interest
on drawings.
3) His
share of loss on the revaluation of assets and liabilities.
4) His
share of undistributed loss, such as debit balance of profit and loss A/c.
5) His
share of the reduction in the value of goodwill.
*Calculation of profit : If the death of a partner occurs on any day
during the year , the executors of the deceased partner will also be entitled
to the share of profits earned by the firm from the beginning of the year till
the date of his death.
Ø
Two methods to ascertain profit:
A) On Time Basis: In this method , we have to take into consideration
the profit of the last year and the time for which he remained a partner during
the current year.
Firm’s Profit = Average Profit X Number of
months
12
Share of deceased person in profit = Firms
profit X Share of deceased person
B) On Turnover or sales Basis:
=
Profit of pervious year/Sales of previous year X Sales of current year
* Individual life policy:
- Instead of taking only
one joint life policy, the firm may take individual policies on the lives of
partners.
Ø
Accounting Treatment :
(1)
When surrender values are not appearing in the books,
·
For amount received from the insurance company
on maturity or death of a partner,
Insurance company A/c Dr.
To
life policy A/c
Life policy A/c Dr.
To
All partners capital A/c (in
old ratio)
·
For recording the deceased partners share in the
surrender value of surviving partners policies,
Surviving partner’s capital A/c Dr.(in
gaining ratio)
To
Deceased partner’s capital A/c
(2)
When surrender values are already appearing in
the books,
·
For amount received from the insurance company
on maturity or death of a partner,
Insurance company A/c Dr.
To life policy A/c
Life policy A/c Dr.(amount received
minus surrender value
Appearing in the balance sheet)
To All
partners capital A/c (in old ratio)
> Entry for recording the surrender value of
surviving partner’s policies will not be passed in this case since they are
already appearing in the balance sheet.
