Reconstitution of Partnership: Retirement and Death of a Partner — Notes

A partner who leaves reconstitutes the firm: the old agreement ends, the remaining partners carry on, and the books are adjusted rather than closed.

• Retirement (Section 32, Indian Partnership Act, 1932): with the consent of all the other partners, under an express agreement, or by written notice in a partnership at will. A retired partner remains liable to third parties for acts of the firm until public notice of his retirement is given.
• Death: subject to the deed, death dissolves the firm (Section 42); most deeds therefore provide that the surviving partners continue.
• The outgoing partner (or his executor) is entitled to his capital and his share of everything the firm earned or built up while he was a partner.

Matters settled: new and gaining ratios; goodwill; revaluation; reserves and accumulated profits or losses; profit till death (on death); amount due and its payment; capitals and the new Balance Sheet.

Not in the ISC 2027 syllabus for this chapter: memorandum revaluation account, and joint life and individual life policies.

Gain = new share − old share. A negative result is a sacrifice by a continuing partner.

Checks: new shares add up to 1; gains minus any sacrifices equal the outgoing partner's share.

Accounting Standard 26: no goodwill account is raised.

• Outgoing partner's share = firm's goodwill × his share. Entry: Gaining partners' Capital A/cs Dr. (gaining ratio) To outgoing partner's Capital A/c.
• A continuing partner who sacrifices is credited too, with sacrifice × goodwill; the gainers pay both.
• Book goodwill: All partners' Capital A/cs Dr. (old ratio) To Goodwill A/c, before anything else.
• Hidden goodwill: agreed settlement − his capital after all other adjustments = his share; firm's goodwill = his share ÷ his profit share.

Revaluation Account: losses (fall in assets, rise in or new liabilities, new provisions) on the debit side; gains on the credit side; the balance goes to all partners in the old ratio.

Reserves and accumulated profits or losses, all partners, old ratio:

• General reserve, credit balance of profit and loss: Reserve A/c Dr. To all partners' Capital A/cs.
• Debit balance of profit and loss, advertisement suspense: all partners' Capital A/cs Dr. To the account.
• Workmen compensation reserve: claim first (Workmen Compensation Claim A/c); balance credited; excess claim debited to Revaluation A/c.
• Investment fluctuation reserve: fall in investments first; balance credited; excess fall debited to Revaluation A/c.

• Time basis: base profit (last year's, or an average of past years) × months to death ÷ 12 × his share.
• Turnover basis: rate = last year's profit ÷ last year's sales; profit to death = sales to death × rate; × his share.

Recording

• Profit and Loss Suspense A/c Dr. To deceased partner's Capital A/c. The suspense account is closed when the year's profit is divided; if a balance sheet is drawn up on the date of death it appears among the assets.
• Or: gaining partners' Capital A/cs Dr. (gaining ratio) To deceased partner's Capital A/c.

Interest on capital, drawings and interest on drawings are also taken up to the date of death.

1. Find the total capital of the new firm: as agreed, or their adjusted capitals + the cash needed (amount paid to the outgoing partner + minimum bank balance − bank available).
2. Required capital = total × new share.
3. Compare with each partner's capital after all adjustments: a shortfall is brought in (Bank A/c Dr. To Capital A/c); a surplus is withdrawn (Capital A/c Dr. To Bank A/c) or credited to a current account.

When cash is brought in to pay the outgoing partner, the amounts brought in add up to the cash needed.

Amount due = closing balance of the outgoing partner's capital account (see the table).

Settlement: paid by bank; transferred to his Loan A/c; or both. If unpaid with no agreement, Section 37 gives him, at his option, the share of profits attributable to the use of his share of the property, or interest at 6% per annum on it.

Loan account (instalments with interest): interest on the balance outstanding is credited to the loan account (Interest A/c Dr. To Loan A/c); each instalment plus interest is paid (Loan A/c Dr. To Bank A/c). Interest for months already run at the year end is credited even when payable later — interest accrued but not due — and is carried down in the balance; interest credited on the instalment date is accrued and due.

Death: the balance of the deceased partner's capital account is transferred to his Executor's A/c, which is paid by bank and/or transferred to the Executor's Loan A/c.

Prepared in horizontal form, liabilities and capitals on the left, assets on the right.

• Liabilities: creditors and other outside liabilities, any claim or outstanding expense brought in, the retiring partner's loan or executor's loan, and the continuing partners' closing capitals.
• Assets: revised values (debtors less provision), the bank after payments and any cash brought in, and Profit and Loss Suspense if used on death.
• Gone: reserves, accumulated losses, advertisement suspense and book goodwill.

Check: both sides total; if not, recompute the bank.