Reconstitution of a Partnership Firm – Retirement/Death of a Partner

A partner leaves: new and gaining ratios, the leaving partner’s goodwill, revaluation and reserves, profit to the date of death, the amount due and instalments.

Key ideas

• The continuing partners gain the leaving partner’s share: each one’s gain is new share − old share.
• The leaving partner’s share of goodwill is credited to that partner’s capital and debited to the continuing partners in the gaining ratio.
• Reserves, accumulated profits and the revaluation result are shared by all the partners, the leaving one included, in the old ratio.
• Profit to the date of death is found on time basis (last year’s profit for the months passed since 1 April) or on sales basis (the profit rate on sales to that date).
• The leaving partner’s capital is credited with goodwill, reserves, revaluation profit, profit to date and interest on capital, and debited with drawings and losses.
• The amount due is paid to the retiring partner or the executors of a deceased one, or moved to a loan account and paid in instalments with interest on the unpaid balance.

Remember

Watch out

• Debiting goodwill to the continuing partners in the old ratio instead of the gaining ratio.
• Counting months from 1 January instead of 1 April.
• Charging interest on the whole original amount with every instalment.

Worked example