Retirement of a partner

The essentials

When a partner retires, his share of profit is taken over by the continuing partners. The amount due to him includes his capital, his share of goodwill, his share of reserves and accumulated profits, and his share of revaluation profit, less his drawings and share of losses. The amount is paid in cash or transferred to his Loan Account if paid later.

Key points

• Gain = New share − Old share; continuing partners share the retiring partner's share in the gaining ratio.
• If nothing is said, continuing partners take over in their old ratio, so gaining ratio = their old ratio.
• Goodwill: Remaining Partners' Capital A/cs Dr (gaining ratio); To Retiring Partner's Capital A/c, with his share of goodwill.
• Revaluation profit or loss and reserves are shared by all partners, including the retiring one, in the old ratio.
• Unpaid amount: Retiring Partner's Capital A/c Dr; To Retiring Partner's Loan A/c.
• Under Section 37 of the Act, if payment is delayed, the outgoing partner may claim, at his option, interest at 6% per annum or a share of profits earned by using his share of property.

Exam tips

Check whether the new ratio of continuing partners is given. If it is, compute each partner's gain separately; one partner may even gain nothing.

Common mistakes

• Using the sacrificing ratio instead of the gaining ratio for goodwill on retirement.
• Leaving the retiring partner out of the revaluation profit.