Financial Accounting · Retirement of Partner

Profit up to Date of Retirement and Final Balance Sheet

Updated 10 October 2026 · Fact-checked

When a partner retires part-way through the year, the firm finds the profit from the start of the year to the retirement date, usually on a time basis or a sales basis. After interest on capital and drawings, the profit is shared in the old ratio. The balance sheet is then redrawn with the new capitals and the retiring partner's loan.

Understand Profit Treatment up to Date of Retirement and Final Balance Sheet

A partner rarely retires on the last day of the accounting year. So the firm needs a fair figure for the profit earned between the start of the year (or the last balance sheet) and the retirement date. The retiring partner is entitled to a share of that profit, and it is shared in the old profit sharing ratio, because he was still a partner during that period.

There are two common ways to estimate that profit when the books are not closed on the retirement date. On the time basis, you assume profit accrues evenly through the year. You take the profit of the year (or of the previous year, if the question says so) and multiply by the months elapsed ÷ 12. On the sales basis, you assume profit moves with sales. You take the profit of the year and multiply by sales up to retirement ÷ total sales. Use sales basis when the question gives sales figures or says business is seasonal. If the question gives a special instruction, follow it.

Interest on capital and interest on drawings must be worked out only up to the retirement date, not for the full year. Interest on capital is a charge against profit, so it is credited to partners' capital accounts. Interest on drawings is charged to the partner who drew, so it is debited to his capital account. Both are applied before the balance profit is shared.

After all adjustments are posted, each partner's capital account shows his final claim. The retiring partner's balance is paid in cash, or transferred to a loan account if payment is delayed. The firm's new balance sheet then shows the continuing partners' capitals, the retiring partner's loan, and the assets and liabilities at revised values.

If the firm keeps running and the retiring partner's dues are not settled, the Indian Partnership Act lets him claim, at his option, either a share of the profits earned from his money or interest at 6% per annum on the amount due. This holds unless the partnership contract says otherwise. Read the question to see which applies.

Key rules to remember

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.

How to solve Profit Treatment up to Date of Retirement and Final Balance Sheet questions

Follow the same order every time. It keeps the ledger clean and makes the balance sheet tally.

1Read the date of retirement and the date of the last balance sheet. Count the months of the period for which profit must be found.
2Decide the basis. Use sales basis if sales are given, otherwise time basis. Find the profit up to the retirement date.
3Work out interest on capital for that period and interest on drawings from each drawing date to the retirement date.
4Prepare the Profit and Loss Appropriation Account: profit, plus interest on drawings, less interest on capital. Share the balance in the old ratio.
5Pass the other retirement adjustments first: reserves, revaluation and goodwill as the question requires, using the proper ratios.
6Prepare the capital accounts in columns. Post drawings and every adjustment. Find the retiring partner's closing balance.
7Show how it is settled: cash paid, balance as loan. Then redraw the balance sheet and check that both sides agree.

Quickest way: Capital account in columns, then a balance check

When to use it: Use this for any comprehensive problem where you have about 20 minutes for 14 marks.

Write the opening capitals first, then add one line for each adjustment in a fixed order: reserve, revaluation, interest on capital, profit share, goodwill, drawings, interest on drawings.
Find the total of net profit and show it on the assets side, for example in cash, if the question says profits are earned in cash.
Work out only the change in assets: revaluation, profit earned, drawings, cash paid to the retiring partner. Do not recopy the whole balance sheet.
Test the balance sheet: continuing partners' capitals + loan + other liabilities must equal total assets. If not, one of your adjustments is missing.

Common mistakes in Profit Treatment up to Date of Retirement and Final Balance Sheet

Using the new ratio to share profit up to the retirement date.
Students see the new ratio in the question and apply it everywhere.
Fix: Profit up to the retirement date belongs to the old firm. Use the old ratio. The new ratio applies only after retirement, and in the gaining ratio for goodwill.
Charging interest on capital and drawings for the full year.
The question gives an annual rate and students apply it automatically.
Fix: Multiply by the months up to the retirement date ÷ 12. Write the months beside each calculation so you do not forget.
Mixing time basis and sales basis.
Both formulas look alike and the question may give both profit and sales.
Fix: Choose one basis from the question wording. Sales basis needs sales up to retirement and total sales. Do not use months at all in that case.
Treating interest on drawings as an expense of the firm.
Students forget it is an income to the firm and a charge to the partner.
Fix: Debit the partner's capital account and credit the Profit and Loss Appropriation Account. It increases the profit available to share.
Forgetting the profit and the drawings when redrawing the balance sheet.
Students adjust capitals but leave assets unchanged, so the balance sheet does not tally.
Fix: Add profit earned to the assets as the question states (usually cash), and deduct drawings and cash paid to the retiring partner from cash.
Leaving the retiring partner's balance in his capital account.
Students stop once the capital account is closed.
Fix: Show the amount paid in cash and transfer the balance to Retiring Partner's Loan Account. The balance sheet shows the loan as a liability, not as capital.

Worked examples

Example 1

C retires from a firm on 30 June 2025. The firm's books for the year ended 31 March 2026 show an actual profit of ₹4,80,000 and sales of ₹60,00,000 for that year. Sales from 1 April to 30 June 2025 were ₹18,00,000. C's share in the old ratio was 1/6. Find C's share of profit up to retirement on (a) time basis and (b) sales basis, using the profit and sales of the year ended 31 March 2026.

Show the solution

Period up to retirement = 1 April to 30 June 2025 = 3 months of the year ended 31 March 2026.
Time basis: profit = 4,80,000 × 3 ÷ 12 = ₹1,20,000.
C's share on time basis = 1,20,000 × 1/6 = ₹20,000.
Sales basis: profit = 4,80,000 × 18,00,000 ÷ 60,00,000 = ₹1,44,000.
C's share on sales basis = 1,44,000 × 1/6 = ₹24,000.

Answer: C's share is ₹20,000 on the time basis and ₹24,000 on the sales basis.

Example 2

A, B and C share profits 5:3:2. The balance sheet on 31 March 2026 shows: Capitals: A ₹3,00,000, B ₹2,00,000, C ₹1,00,000; General Reserve ₹60,000; Creditors ₹1,40,000. Assets: Land ₹2,00,000, Stock ₹2,00,000, Debtors ₹2,50,000, Cash ₹1,50,000. C retires on 30 June 2026. Terms: (i) the profit for the year to 31 March 2026 was ₹2,40,000, before interest on capital; profit up to retirement is estimated on time basis from this figure and is earned in cash; (ii) interest on capital 10% p.a. is calculated on the capital balances shown above (as at 31 March 2026, before the reserve, revaluation and goodwill adjustments) for 3 months; (iii) C drew ₹30,000 on 1 May 2026; interest on drawings 12% p.a.; no other drawings; (iv) land is revalued upwards by ₹40,000; (v) goodwill of the firm is ₹1,00,000, and A and B will share future profits 3:2; (vi) C is paid ₹1,00,000 as a loan and the balance in cash. Prepare the Partners' Capital Accounts and the Balance Sheet after retirement.

Show the solution

Profit for 3 months (before interest on capital) = 2,40,000 × 3 ÷ 12 = ₹60,000.
Interest on capital for 3 months, on the capitals at 31 March 2026: A = 3,00,000 × 10% × 3/12 = ₹7,500; B = ₹5,000; C = ₹2,500. Total ₹15,000.
Interest on drawings: C = 30,000 × 12% × 2/12 = ₹600 (1 May to 30 June is 2 months).
Profit available to share = 60,000 − 15,000 + 600 = ₹45,600. Share 5:3:2: A = ₹22,800, B = ₹13,680, C = ₹9,120.
General reserve of ₹60,000 in 5:3:2: A ₹30,000, B ₹18,000, C ₹12,000. Revaluation profit ₹40,000 in 5:3:2: A ₹20,000, B ₹12,000, C ₹8,000.
Gaining ratio: A = 3/5 − 5/10 = 1/10; B = 2/5 − 3/10 = 1/10. C's goodwill share = 1,00,000 × 2/10 = ₹20,000. A and B each pay ₹10,000: debit A and B, credit C.
Capital A = 3,00,000 + 30,000 + 20,000 + 7,500 + 22,800 − 10,000 = ₹3,70,300.
Capital B = 2,00,000 + 18,000 + 12,000 + 5,000 + 13,680 − 10,000 = ₹2,38,680.
Capital C = 1,00,000 + 12,000 + 8,000 + 2,500 + 9,120 + 20,000 − 600 − 30,000 = ₹1,21,020.
C is paid ₹1,00,000 as loan and ₹21,020 in cash.
Cash = 1,50,000 + 60,000 profit − 30,000 drawings − 21,020 paid to C = ₹1,58,980. Land = 2,00,000 + 40,000 = ₹2,40,000.
Balance sheet liabilities: A's Capital ₹3,70,300 + B's Capital ₹2,38,680 + C's Loan ₹1,00,000 + Creditors ₹1,40,000 = ₹8,48,980.
Assets: Land ₹2,40,000 + Stock ₹2,00,000 + Debtors ₹2,50,000 + Cash ₹1,58,980 = ₹8,48,980. Both sides agree.

Answer: C's amount due is ₹1,21,020, paid as ₹21,020 cash and a ₹1,00,000 loan. The new balance sheet shows A's capital ₹3,70,300, B's capital ₹2,38,680, C's loan ₹1,00,000 and creditors ₹1,40,000, totalling ₹8,48,980.

Exam tips

Write the number of months beside every interest calculation. Examiners give step marks for the period used, even if you slip later.
Check whether the question says profit is earned in cash. If it does, add it to cash in the balance sheet; if it does not, state your assumption.
Show the Profit and Loss Appropriation Account separately, with interest on capital, interest on drawings and the share of profit on each line. It earns clear step marks.
For MCQs, the typical trap is the base figure: current year's profit versus previous year's profit, or time versus sales basis. Underline the words in the question before you calculate.
Always tally the balance sheet before submitting. A mismatch usually means a missed profit, drawings or loan entry.

Practice questions from Retirement of Partner

Profit Treatment up to Date of Retirement and Final Balance Sheet: frequently asked questions

What is the difference between the time basis and the sales basis for profit up to retirement?

On the time basis you assume profit is earned evenly through the year and multiply by months elapsed ÷ 12. On the sales basis you assume profit follows sales and multiply by sales up to retirement ÷ total sales. Use the one the question points to.

How do you calculate interest on drawings on retirement of a partner?

Multiply the drawings by the rate and by the period from the date of drawing up to the retirement date, over 12 months. If dates are not given, use an average period, such as half of the period for evenly spread drawings. The amount is debited to the partner's capital account.

Which ratio is used to share profit up to the date of retirement?

Use the old profit sharing ratio. The retiring partner was still a partner for that period. The new ratio applies only from the day after retirement, and the gaining ratio is used for goodwill.

How do you prepare the balance sheet after retirement of a partner?

First complete the capital accounts with all adjustments and find the retiring partner's closing balance. Show the part paid in cash and transfer the rest to his loan account. Then redraw the balance sheet with continuing partners' new capitals, the loan, revalued assets and updated cash, and check that both sides agree.