Steps in Process of Retirement

8/12/2019 Steps in Process of Retirement

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KSHITIJ EDUCATIONSpecialized Institute for Mathematics, Computer Science & Commerce

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STEPS IN PROCESS OF RETIREMENT A PARTNER FROMPARTNERSHIP FIRM (Let retiring partner be Mr. R)

1. Calculate new profit sharing ratio & gaining ratio of remaining partners.2. Open all Partner s capital accounts, cash/bank account & revaluation account.3. Transfer Rs Loan a/c (if any) & Rs Current a/c(if any) to his capital account.4. Divide WCF(after adjustment if any), General Reserve, Reserve Fund, Advertisement

Suspense,Profit & loss a/c (dr or cr), Goodwill a/c from Balance Sheet in Old Profit SharingRatio among all partners.

5. Revalue assets & liabilities as given in the question & Divide the profit/loss of revaluation in old profit sharing ratio among all partners (including retiring partner).

6. Calculate goodwill of the firm and the share of retiring partner in firms goodwill.

7. Pass the entry for goodwill in Gaining Ratio.

8. Extraordinary case : The partner is retiring after the date of Balance Sheet, he must also be given(a) The share of profits for the period in between(b) The interest on Capital in that period.(c) The interest on loan in that period

9. Settling the R s account as per the language of question

a. Pay through cash or bank b. Pay by raising a bank loan

b.

c. Convert it into Rs loan a/c.

Pass the entry & transfer As loan a/c

to new Balance Sheet.

d. Convert it into R s loan a/c and pay it in installments with interest over a period and show

Cs loan account for next three years

Prepare R s loan a/c for the given period and pay as per the language of question.e.g. The amount due to Mr. R the retiring partner is to be paid in three annual equalinstallments along with interest of 10% per year.Transfer RCapital a/c to Rs Loan a/c ( Let the amount be Rs.120000)

Entry :

Rs Capital a/c Dr.

To Cash/bank a/c

Entry :

Rs Capital a/c Dr.

To Bank Overdraft a/c

Entry :

Rs Capital a/c Dr.

To Rs Loan a/c

As Capital a/c

Bs Capital a/c Dr.

To Rs Capital a/c


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Rs Loan a/c

31/3/2008To Bank(40000+12000)

52000 1/4/2007 By Rs Capital a/c 120000

31/3/2008 To Bal c/d 80000 31/3/2008By Interest(10% of 120000)

12000

132000 132000

31/3/2009To Bank(40000+8000)

48000 1/4/2008 By Bal b/d 80000

31/3/2009 To bal c/d 40000 31/3/2009By Interest(10% of 80000)

8000

88000 88000

31/3/2010To Bank(40000+4000) 44000 1/4/2009 By Bal b/d 40000

31/3/2010By Interest(10% of 40000)

4000

44000 44000

e. The remaining partners will bring enough cash to settle the account of retiring partnerand adjust the capitals of remaining partners in PSR.

Balance of Capital accounts of all old partners after all adjustments (includingMr. R) Cash & Bank Balance(latest) = Capital of New firm

Divide the Capital of the New firm among partners in new PSR. Adjust the capital accounts of remaining partners through cash/bank . Pay retiring partner Mr. R by cash/bank. In Balance Sheet Rs Loan & Cash Balance will be nil.

f. The remaining partners will bring enough cash to settle the account of retiring partnerand keeping the cash balance at Rs. X and adjust the capitals of remaining partners in

PSR.Balance of Capital accounts of all old partners after all adjustments (includingMr. R) + Rs. X Cash & Bank Balance (latest) = Capital of New firm

Divide the Capital of the New firm among partners in new PSR Adjust the capital accounts of remaining partners through cash/bank. Pay retiring partner Mr.R through cash/bank. The new cash/bank balance in Balance Sheet will be Rs. X and Rs Loan a/c

will be nil


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Method to Adjust Capital in case of Retirement

Balance inCapital Account of A +

Balance inCapital Account of B +

Amount Due to retiring partner 1 +

Cash BalanceRequired in the end 2 +

Total

Cash Balance requiredat the end

-

Total Capitalof the new firm

Divide Total Capital of the new firm in new Profit Sharing Ratio

A B(1) New Capital in PSR A Capital in new PSR Bs Capital in new PSR (2) less Balance in Capital a/c

Cash Brought by partners = (1)-(2)

As Cash Bs Cash

Journal Entry

In the Final Balance sheetAs Capital & Bs Capital : New Capital in PSRCs Capital : Nil Balance (No Cs loan account in Balance Sheet) Cash Balance : Cash Balance Required at the end(see 2 above)

Cash/Bank a/c Dr.

As Capital a/c As Cash

Bs Capital a/c Bs Cash

Cs Capital a/c Amt due to C

To Cs Capital a/c

(see 1 above)

Documents

Steps in Process of Retirement