Accounting problems on the retirement of the partner


  • 1. Change in the profit sharing ratio
  • 2. Accounting treatment of goodwill
  • 3. Revaluation of assets and liabilities
  • 4. Treatment of reserves and undistributed profits
  • 5. Payment of amount due to retiring partner
  • 6. Adjustment of capitals

New Profit sharing ratio:

The new profit sharing ratio is the ratio in which the continuing partners will share the profits after the retiring partner leaves the firm. The new share of remaining partner will be the sum total of his of old share of profits and the profit share acquired from the new partner.

New Profit sharing ratio = Old share of profits + share of profits acquired from the retiring partner

Gaining Ratio:

The ratio in which the continuing partners acquire the retiring partner share of profits is known as gaining ratio.

Differences between gaining ratio and sacrificing ratio

Basis

Sacrificing ratio

Gaining Ratio

Meaning

 

 

 

 

Purpose

 

 

 

Time of calculation

 

Formula

It is the ratio in which the existing or old partners agree to sacrifice their share in profits in favour of the incoming or new partner.

 

It is calculated to determine the amount of compensation to be paid by the incoming partner to the existing partners.

It is calculated when a new partner is admitted and when there is change in profit sharing ratio.

Old ratio - New Ratio

The ratio in which continuing partners acquire a retiring deceased partner share of profit is known as gaining ratio.

 

 

It is calculated to determine the amount of compensation to be paid by continuing partners to the retiring partners or the executer of the deceased partner.

It is calculated when the partner retires or on the death of a partner and at the time of change in profit sharing ratio.

New Ratio - Old Ratio

 

Case 1: When nothing is given about the new profit sharing ratio of the remaining partners: Under this situation the calculation of new ratio is done by striking out the share of the retiring partner.

Illustration 1: A, B and C are partners sharing in the ratio 3:2:1. Calculate new ratio if:

  • (a) If A retires
  • (b) If B retires
  • (c) If C retires

Solution:

Old Profit ratio = 3:2:1

  • (a) If A retires new profit ratio will be 2:1
  • (b) If B retires new profit ratio will be 3:1
  • (c) If C retires new profit ratio will be 3:2

Case 2: When gains of the continuing partners are specifically given in the question: In such a case, the new shares of the continuing partners are calculated by adding their respective gain to their old share.

New share = Old share + Gain

Illustration 2:

A, B and C are partners sharing in the ratio 3:2:1. A retires and his share is taken over by the remaining partners as follow

B takes 2/6th from A

C takes 1/6th from A

Calculate new ratio

Solution:

B's New Share = B's old share + B's gain = 2/6 + 2/6 = 4/6

C's New Share = C's old share + C's gain = 1/6 + 1/6 = 2/6

So the new share = 4/6: 2/6 = 2:1

Case 3: When the ratio in which the remaining partners acquire the share of the outgoing partner is given: Following steps are followed:

Step 1:    Determine the share acquired by each of remaining partner.

Step 2:    Find out new share of remaining partners as follows:

               New share = Old share + Share acquired from the outgoing partner

Step 3:    Now calculate the new ratio

Illustration 3:

A, B and C are partners sharing profits in the ratio 3:2:1. B retires and his share was acquired by A and C in the ratio 2:1. Calculate new ratio.

Solution:

Share acquired by A = 2/6 × 2/3 = 4/18

Share acquired by C = 2/6 × 1/3 = 2/18

A's New Share =A's old share +A's gain = 3/6 + 4/18 = 13/18

C's New Share = C's old share + C's gain = 1/6+ 2/18 = 5/18

New Ratio = 13:5