Financial Accounting · Retirement of Partner

Adjustment of Capitals and Joint Life Policy on Retirement

Updated 10 October 2026 · Fact-checked

On retirement, continuing partners' capitals are often reset to match the new profit sharing ratio. Fix the total capital, split it in the new ratio, compare with the adjusted balances, and bring in or withdraw cash for the difference. A joint life policy is either shown at surrender value or shared among all partners in the old ratio.

Understand Adjustment of Capitals and Joint Life Policy

When a partner retires, the firm's profit sharing ratio changes. Many deeds or questions say the continuing partners' capitals must now stand in the new profit sharing ratio. This keeps capital in line with each partner's share of profit.

First you settle everything else: goodwill, revaluation, reserves and the retiring partner's dues. After these entries, each continuing partner's capital account has an adjusted balance. These balances will rarely match the new ratio. So you compute the required capital of each partner and compare it with the adjusted balance. A shortfall is made good by cash brought in. An excess is withdrawn or kept as a credit balance.

The total capital of the new firm is either given in the question or taken as the total of the continuing partners' adjusted capitals. If the total is given, split it directly in the new ratio. If it is not given, add the adjusted capitals and split that total.

A joint life policy is taken on the lives of all partners, and the firm pays the premium. When a partner retires, the policy does not pay out, because no one has died. So you deal with its book value. If the policy is shown at surrender value (or the firm surrenders it), the difference between the surrender value and the book value is a gain or loss. If the policy is not surrendered, only the JLP reserve is transferred to the partners' capital accounts, including the retiring partner's, in the old ratio. The policy stays in the books as an asset at its book value.

Remember the key idea: the policy belongs to all partners until the retirement date. So any surplus or deficit on it belongs to the old partners in their old ratio.

Key rules to remember

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.

How to solve Adjustment of Capitals and Joint Life Policy questions

Work in a fixed order so that no adjustment is missed and each partner's capital is correct before you reset it.

1Write the old ratio, the new ratio and the retiring partner's share of profit.
2Pass entries for the joint life policy first. Find the surrender value, book value and any reserve, then share the gain, loss or reserve in the old ratio.
3Pass entries for goodwill, revaluation and reserves or accumulated profits, all in the proper ratios.
4Prepare partners' capital accounts with opening balances, adjustments, and the amount payable to the retiring partner transferred out.
5Read off each continuing partner's adjusted capital balance.
6Find the total new capital: use the amount given, or add the adjusted capitals if it is not given.
7Split the total in the new ratio to get each required capital, then compute the surplus or shortfall.
8Pass the cash entry for amounts brought in or withdrawn and show the final Balance Sheet.

Quickest way: Capital table first, journal later

When to use it: Use it when the question gives many adjustments and you have little time.

Draw one capital account in columns for all partners, with the retiring partner included.
Post the JLP, goodwill, revaluation and reserve effects directly using the right ratios.
Take the retiring partner's balance out to his or her loan or payable account.
Total the continuing partners' balances and split in the new ratio if no total is given.
Write the difference as cash brought in or withdrawn, and check that the total of the capital column equals the total of required capitals.

Common mistakes in Adjustment of Capitals and Joint Life Policy

Sharing the joint life policy surplus in the new ratio or gaining ratio
Students link every retirement adjustment with the new 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
The capital step looks like the last part of the question but is done in a hurry.
Fix: Always compute the adjusted capital balance only after every other adjustment is posted.
Including the retiring partner in the total new capital
The old capital total is added by habit.
Fix: Remove the retiring partner's amount first. Only continuing partners form the new capital base.
Ignoring the book value of the policy while recording the surrender value
Students credit the surrender value alone to the Policy account.
Fix: Credit the book value to clear the Policy account and take the difference to partners' capitals as gain or loss.
Treating a shortfall as withdrawal and an excess as cash brought in
The sign of the difference is reversed.
Fix: Compare Required with Adjusted. If required is higher, the partner brings cash in. If lower, the partner withdraws.

Worked examples

Example 1

A, B and C share profits 3:2:1. C retires. A and B will share profits 2:1 in future. After all adjustments, and after C's dues have been transferred to C's loan account (this does not affect A's and B's capitals), the capital balances are A ₹2,40,000 and B ₹1,40,000. The total capital of the new firm is fixed at ₹4,50,000, to be shared by A and B in the new ratio 2:1. Find the cash to be brought in or withdrawn.

Show the solution

New ratio of A and B is 2:1.
Required capital of A = ₹4,50,000 × 2/3 = ₹3,00,000.
Required capital of B = ₹4,50,000 × 1/3 = ₹1,50,000.
A's difference = ₹3,00,000 − ₹2,40,000 = ₹60,000, which A brings in.
B's difference = ₹1,50,000 − ₹1,40,000 = ₹10,000, which B brings in.
Check: adjusted capitals ₹3,80,000 + cash brought in ₹70,000 = ₹4,50,000, the fixed total.
Journal: Bank A/c Dr ₹70,000; To A's Capital A/c ₹60,000; To B's Capital A/c ₹10,000.

Answer: A brings in ₹60,000 and B brings in ₹10,000. Total cash received is ₹70,000.

Example 2

X, Y and Z share profits 5:3:2. Z retires. The Balance Sheet shows Joint Life Policy at ₹50,000 (book value) and a Joint Life Policy Reserve of ₹50,000. The policy is surrendered for ₹60,000. Show the effect on partners and the journal entries. X and Y will share in future 5:3. These credits to the partners' capitals are made before the amount due to Z is computed.

Show the solution

Surrender value received is ₹60,000 against a book value of ₹50,000, so the profit on surrender is ₹10,000.
Entry 1 (surrender): Bank A/c Dr ₹60,000; To Joint Life Policy A/c ₹50,000; To Profit on Surrender of Policy A/c ₹10,000. This clears the Policy A/c.
Entry 2 (share reserve and profit): Joint Life Policy Reserve A/c Dr ₹50,000; Profit on Surrender of Policy A/c Dr ₹10,000; To X's Capital A/c ₹30,000; To Y's Capital A/c ₹18,000; To Z's Capital A/c ₹12,000. The total ₹60,000 is shared in the old ratio 5:3:2.
Working: X = ₹60,000 × 5/10 = ₹30,000; Y = ₹60,000 × 3/10 = ₹18,000; Z = ₹60,000 × 2/10 = ₹12,000.
The net credit to the partners (₹30,000 + ₹18,000 + ₹12,000 = ₹60,000) equals the surrender value received.
Z's credit of ₹12,000 is posted to Z's capital before settlement, so it is included in the amount due to Z.
The new ratio is not used in these entries.

Answer: The reserve of ₹50,000 and the surrender profit of ₹10,000 are shared together in the old ratio 5:3:2. X gets ₹30,000, Y gets ₹18,000 and Z gets ₹12,000, a total of ₹60,000, equal to the surrender value. Z's ₹12,000 is included in the amount settled to Z.

Exam tips

Read the question for a stated total capital. If one is given, use it. If none is given, use the sum of continuing partners' adjusted capitals.
For joint life policy, write the old ratio on your page before you start. This prevents using the wrong ratio.
Show the capital accounts in full. Even if a number is wrong, step marks are earned for correct method.
In MCQs, the usual traps are using the new ratio for the policy and including the retiring partner in the capital total. Check both before you choose an option.
Write the cash entry as a separate journal with the amounts brought in and withdrawn, so the examiner can see the working.

Practice questions from Retirement of Partner

Adjustment of Capitals and Joint Life Policy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CSEETAdjustments in Final Accounts

Adjustment of Capitals and Joint Life Policy: frequently asked questions

How do I calculate the new capital of continuing partners after retirement?

Post all adjustments to the capital accounts first and find each adjusted balance. Fix the total capital, split it in the new ratio, and compare each required capital with the adjusted balance. The difference is cash brought in or withdrawn.

In which ratio is the joint life policy treated on retirement?

Any surplus, reserve or loss on the joint life policy is shared by all partners, including the retiring partner, in the old profit sharing ratio. This is because the policy belonged to them before retirement.

What is the journal entry when a joint life policy is surrendered?

Debit Bank for the surrender value and credit Joint Life Policy account for its book value. Credit the difference as a profit, or debit it as a loss, and transfer it to the partners' capitals in the old ratio. Any reserve is also transferred to capitals in the old ratio.

Is the total capital always given in the question?

No. Sometimes the total is stated, and sometimes you take it as the sum of the continuing partners' adjusted capitals. Read the question carefully to see which applies.