1. Chapter – 2 Retirement of a partner
Chapter outcomes:
Meaning of retirement of a partner;
Accounting treatment on retirement of a partner;
Revaluation of assets and liabilities
Transfer of accumulated profits and losses and reserves;
Treatment of goodwill
Final settlement of amount due to retiring partner
Practical exercises;

2. Meaning of retirement
Meaning: Partnership is an agreement among the partners to carry on a particular business and share the profits and losses thereof. In a partnership, a partner is having the right to retire from the business. When a partner express his willingness in writing to retire, the partnership firm comes to an end. Hence on retirement, the firm is to be dissolved and the account of the retiring firm should be settled down. After the retirement, the old partners can continue to carryon the same business with a new name to the partnership firm/

3. Accounting treatment on the retirement of partner
When a partner retires from the partnership, the following accounting treatments are done:
Revaluation of assets and liabilities;
Transfer of accumulated profits or losses and reserves;
Treatment of goodwill;
Settlement of retiring partners’ account

4. Revaluation of assets and liabilities
Like admission, when a partner retires, the firm should carry on the revaluation of assets and liabilities of the firm in order to find out profit or loss on the revaluation. The profit or loss on revaluation of assets and liabilities will be transferred to all the partners including the retiring partners. The following entries are passed in this regard: If profit: Revaluation Account Dr. XXXX All the partners capital Ac. Cr. XXXX (Being the profit on revaluation transferred to partners capital ac.) If loss: Reverse the above entry

5. Transfer of accumulated profits or losses and reserves
On the retirement of a partner from the partnership firm, the amount of profits or loss and reserves would be transferred to all the partners capital account. The following entries will be passed in the books of the firm: If there are profits and reserves: Profit and loss account Dr. XXXX Reserves account Dr. XXXX All the partners capital Ac Cr. XXXX (Being the accumulated profits and reserves transferred to partners capital account) If there is loss: Partners capital account Dr. XXXX Profit and loss account Cr. XXXX (Being the loss transferred to partners capital account)

6. Treatment of goodwill
When a partner retires from the firm, the firm should calculate the amount of goodwill to be recorded in the books. This is done to ensure that the outgoing partner gets his share of goodwill in the firm. The following entry is passed to record the goodwill of the firm: Goodwill account Dr. XXXX All the partners capital account Cr. XXXX (Being the goodwill recorded) When the existing goodwill is to be written off, the following entry will be passed: All the partners capital account Dr. XXXX Goodwill account Cr. XXXX (Being the goodwill written off)

7. Final settlement of the account of retiring partner
After making all the books adjustment regarding the revaluation of assets and liabilities, treatment of goodwill and transfer of accumulated profits and losses, the final amount to be paid to or received from the retiring partner should be arrived at. If the amount is paid to the retiring partner or treated as loan: Retiring Partner’s capital account Dr. XXXX Bank account / Loan Ac. Cr. XXXX (Being the amount paid to the retiring partner) If the amount is received from the retiring partner: Bank Account Dr. XXXX Retiring partner’s capital account Cr. XXXX (Being the amount received from the partner)

8. Adjustment of capital account of existing partners
When a partner retires from the business, sometimes, the existing partners have to rearrange their capital account according to the requirement. In that case, the excess capital of the existing partner will be paid or if there is deficiency, the partners should bring in.
When the excess capital of old partners are paid:
Old partners capital account Dr XXXXX
Bank account Cr XXXXX
(Being the excess amount paid to old partners)
2. When the deficit amount is brought in by older partners:
Bank account Dr. XXXXX
Old partners capital account Cr XXXXX
(Being the capital brought in by old partners)