CMA Intermediate · Financial Accounting

Retirement of Partner: formula sheet

Full chapter guide

Key formulas

Gaining ratio: Gaining ratio = New share − Old share (for each continuing partner); Used to charge goodwill to the gaining partners. It must be positive for each continuing partner.
Gaining ratio when retiree's share is taken in old ratio: If continuing partners acquire the retiree's share in their old ratio: gaining ratio = old ratio of continuing partners, and their new ratio = their old ratio; This applies only when the question says the retiree's share is acquired in the old ratio. In other cases, find the gaining ratio as New share − Old share.
Retiring partner's goodwill share: Goodwill share = Total goodwill × Retiring partner's old share; Credit the retiree and debit the gaining partners in the gaining ratio.
Amount due to retiring partner: Amount due = Capital + Interest on capital and salary/commission up to date of retirement + Share of reserves and accumulated profits + Share of goodwill (credited to retiree) + Share of revaluation profit + Share of profit up to retirement − Share of revaluation loss − Drawings − Interest on drawings − Share of any losses; The retiree's share of goodwill is credited to him. Drawings, interest on drawings and any share of losses are deducted. Interest on capital and salary or commission are due only up to the date of retirement. Use the adjusted balances after all entries are posted.
Revaluation profit or loss: Profit or loss = Increase in assets + Decrease in liabilities − Decrease in assets − Increase in liabilities; Share it among all old partners in the old ratio, including the retiring partner.
Reserves and accumulated profits: Credit all old partners in the old profit sharing ratio; Applies to General Reserve and Profit and Loss credit balance. Debit balances are shared the same way as losses.
Gain of a continuing partner: Gain = New share − Old share; Work with fractions on a common denominator. The gain is positive for a continuing partner on retirement.
Gaining ratio: Gaining ratio = Gain of A : Gain of B : Gain of C ...; Simplify the ratio of gains. The sum of all gains equals the retiring partner's old share.
Retiring partner's share taken over in a stated ratio: New share = Old share + (Retiring partner's share × Ratio in which it is taken); Use when the question says the share is acquired in a ratio, such as equally or 3 : 2.
Share taken in the old ratio: New ratio = Old ratio of continuing partners; If the retiring partner's share is taken in the old ratio, the gaining ratio is also the old ratio of the continuing partners, and the new ratio equals that old ratio.
Check: Sum of new shares = 1; Sum of gains = Retiring partner's old share; Always verify both checks before moving on.
Sacrificing ratio (for contrast): Sacrifice = Old share − New share; Used on admission of a partner, not on retirement.
Gaining ratio: Gaining ratio = New ratio − Old ratio (for each continuing partner); Gains add up to the retiring partner's old share. If you get a different total, recheck.
Retiring partner's share of goodwill: Share = Total goodwill × Retiring partner's old profit share; Use the old ratio. This is the amount credited to his capital account.
Goodwill by average profit: Goodwill = Average profit × Number of years' purchase; Use normal, adjusted profits. Remove abnormal items before averaging.
Goodwill by super profit: Super profit = Average profit − Normal profit; Goodwill = Super profit × Years' purchase; Normal profit = Capital employed × Normal rate of return ÷ 100.
Hidden goodwill: Hidden goodwill = Total value of firm − Net assets (capital) excluding existing goodwill; Total value of firm = Retiring partner's capital ÷ his share, or as given.
Entry for goodwill not in books: Gaining partners' Capital A/cs Dr (in gaining ratio) To Retiring partner's Capital A/c; No goodwill account is opened in this method.
Entry to write off existing goodwill: All partners' Capital A/cs Dr (in old ratio) To Goodwill A/c; Do this first, then pass the entry for new goodwill.
Revaluation profit or loss: Profit = Total credits (assets ↑, liabilities ↓) − Total debits (assets ↓, liabilities ↑); Positive balance is profit; negative is loss. Share in the old ratio.
Sharing rule: Revaluation result, reserves, accumulated profits and losses → all partners in OLD ratio; The retiring partner shares fully. The new ratio is not used here.
Entry: asset increased: Asset A/c Dr; to Revaluation A/c; Reverse for a decrease.
Entry: liability increased or unrecorded: Revaluation A/c Dr; to Liability A/c; Reverse for a decrease in liability.
Entry: profit on revaluation: Revaluation A/c Dr; to Partners' Capital A/cs (old ratio); For a loss, reverse the entry.
Entry: reserves and profits: General Reserve / P&L A/c Dr; to Partners' Capital A/cs (old ratio); For accumulated loss, credit P&L A/c and debit capitals.
Entry: reserve for a known liability: Reserve Dr; to Liability A/c, then only the excess to capitals; Example: Workmen Compensation Reserve against a claim.
Required capital of a continuing partner: Required capital = Total new capital × Partner's new share; Use the new profit sharing ratio. Total capital is given, or equals the sum of adjusted capitals of continuing partners.
Cash to bring in or withdraw: Difference = Required capital − Adjusted capital balance; Positive means the partner brings in cash. Negative means the partner withdraws cash.
Gaining ratio: Gaining ratio = New ratio − Old ratio; Used for goodwill adjustment between continuing partners. It is not used to share the joint life policy surplus.
JLP when surrendered value differs from book value: Gain or loss = Surrender value − Book value of policy; Transfer to the partners' capital accounts in the old ratio.
JLP with reserve, policy not surrendered: Dr JLP Reserve; Cr Partners' Capital A/cs in the old ratio; The reserve is credited to the partners, never to the Policy A/c. The policy itself stays in the books as an asset.
Entry for JLP surrendered with a reserve: Dr Bank; Cr Policy A/c (book value); Cr Profit on Surrender. Then Dr JLP Reserve and Dr Profit on Surrender; Cr Partners' Capital A/cs in the old ratio; Record the surrender first. Then share the reserve and the profit (or loss) on surrender among all partners in the old ratio.
Amount due to retiring partner: Capital + Share of reserves/accumulated profits + Share of goodwill + Share of revaluation profit + Interest on capital + Salary/commission + Share of profit to date − Drawings − Interest on drawings − Share of revaluation loss − Share of accumulated losses; Use the closing balance of the retiring partner's capital account after all adjustments. Reverse the sign of an item that is a loss or a deduction.
Amount payable as loan: Amount due − Cash paid at retirement; Transfer this balance from the capital account to the Retiring Partner's Loan Account.
Interest on loan: Interest = Outstanding balance × Rate of interest × Time period (years); Use the balance outstanding during each period. For months, multiply by months ÷ 12.
Instalment with interest: Instalment paid = Principal instalment + Interest on opening outstanding balance; Applies when equal principal instalments are paid. If total equal instalments are given, work out the interest part first and the rest is principal.
Section 37, Indian Partnership Act, 1932: Outgoing partner's option: share of profits attributable to use of his share of property OR interest at 6% p.a. on his share in the firm's property; Applies when the continuing partners carry on business using the firm's property without final settlement. It does not apply if the buy-out option in the agreement has been duly exercised.
Profit up to retirement, time basis: Profit = Profit of the year × Months up to retirement ÷ 12; Use when no sales data is given or the question says profit accrues evenly. The base may be the current year's profit or the previous year's profit, as the question states.
Profit up to retirement, sales basis: Profit = Profit of the year × Sales up to retirement ÷ Total sales of the year; Use when sales figures are given. Do not mix it with time basis.
Retiring partner's share of profit: Share = Profit up to retirement × Retiring partner's old ratio; Always use the old ratio. The new ratio starts after retirement.
Interest on capital: Interest = Capital × Rate ÷ 100 × Months ÷ 12; Charge only up to the retirement date. Use the capital specified in the question, usually the opening capital, after any adjustment the question requires.
Interest on drawings, fixed dates: Interest = Drawings × Rate ÷ 100 × Months from drawing date to retirement ÷ 12; Debit the partner's capital account and credit the Profit and Loss Appropriation Account.
Interest on drawings, dates not given: Average period = half of the period if drawn evenly; (n + 1) ÷ 2 months if drawn at the start of each of n months; (n − 1) ÷ 2 months if drawn at the end of each month; For a full year with drawings at the start of each month, this gives 6.5 months.
Amount due to retiring partner: Closing capital = Opening capital + Reserves + Revaluation profit + Interest on capital + Share of profit + Goodwill credit − Drawings − Interest on drawings − Goodwill debit; Items such as goodwill and revaluation apply only if the question gives them. Whatever is not paid in cash moves to the retiring partner's loan account.

Quick revision

Retirement: the firm continues, only the retiring partner leaves.
Gaining ratio = new share − old share of each continuing partner.
The gaining partners compensate the retiring partner for goodwill, in the gaining ratio.
Goodwill share of the retiring partner = total goodwill × retiring partner's old share.
Revaluation profit or loss, reserves and accumulated profits go to all old partners in the old ratio, unless the partnership deed or agreement provides otherwise.
Revaluation account is prepared before the retiring partner's settlement.
Joint life policy: transfer the JLP reserve to the old partners' capital accounts in the old ratio. If the policy is shown as an asset and its surrender value differs from its book value, adjust the difference (profit or loss) through the old partners' capital accounts in the old ratio. If the JLP is not shown as an asset, credit the surrender value to the old partners in the old ratio. The surrender value is then treated as an asset or cash.
Amount due = capital ± share of revaluation profit/loss + share of reserves and undistributed profits − share of accumulated losses + share of goodwill (if credited to the retiring partner's account) + interest on capital + salary/commission due − drawings − interest on drawings + share of profit up to retirement (or − share of loss). Add interest on capital, salary or commission only to the extent not already credited to the capital account, to avoid double counting.
Unpaid balance is moved to the retiring partner's loan account and carries interest as agreed.
Profit up to retirement is calculated by time or on sales basis, as the question says.
If the continuing partners acquire the retiring partner's share in their existing ratio, or no new ratio is given, the new ratio is the old ratio among the continuing partners, and the gaining ratio equals that ratio.
Check the balance sheet totals at the end.

Common mistakes

Charging the full goodwill to the continuing partners. Fix: Find the retiree's goodwill share first, then divide only that amount in the gaining ratio.
Sharing revaluation profit or loss in the new ratio. Fix: Revaluation and reserves belong to the period before retirement, so use the old ratio and include the retiree.
Using the old ratio of all partners, including the retiring partner, to compute the new ratio. Fix: Remove the retiring partner first. Then decide how his share is added to the others.
Calculating Old share − New share, as on admission. Fix: On retirement, the continuing partners gain. Use New share − Old share. Gains must come out positive.
Using the old ratio instead of the gaining ratio to debit the continuing partners. Fix: Ask who benefits. The gainers pay, in the proportion of their gain. Write the gaining ratio before you pass any entry.
Crediting the retiring partner with the wrong share, such as using the new ratio or the gaining ratio. Fix: His share is always his old profit share of the total goodwill.
Sharing revaluation profit or loss in the new ratio Fix: It relates to the past, so use the old ratio for all partners, including the retiring partner.
Excluding the retiring partner from reserve distribution Fix: Reserves belong to all old partners. Credit the retiring partner's capital too.
Sharing the joint life policy surplus in the new ratio or gaining ratio Fix: Share the JLP surplus, reserve or loss in the old ratio, because it relates to the period before retirement.
Resetting capitals before posting goodwill and revaluation Fix: Always compute the adjusted capital balance only after every other adjustment is posted.

Exam tips

Read the settlement line first. Whether the amount is paid at once, in instalments or as a loan decides the last entry and the balance sheet.
Draw a small ratio table for old, new and gaining ratios. Marks are often given for it, and it prevents arithmetic errors.
Show Revaluation Account, Partners' Capital Accounts and Balance Sheet separately. Step marks are awarded for each.
In MCQs, check whether the retiree's share was acquired in the old ratio, in equal shares or in a stated ratio. The gaining ratio changes with it.
For theory, quote Section 32 of the Indian Partnership Act, 1932, and mention that the retiree remains liable to third parties until notice is given.
In MCQs, first check whether the share is taken in the old ratio. If it is, the gaining ratio is the old ratio of the continuing partners and you save time.
In written answers, show the fractions, the gains and the check that gains equal the retiring partner's share. These earn step marks even if a later figure goes wrong.
Read the wording on how the share is taken: equally, in the old ratio, or in a stated ratio. Each leads to a different working.