Retirement of Partner Accounting

Retirement of Partner Accounting

Retirement of a partner accounting has been explained in this article. The retirement would also result in creation of new partnership in place of old one. The following accounting process is adopted to account for the retirement of a partner. 

a)    Goodwill is measured.

b)   Goodwill is charged to partner accounts in old ratio.

c)    Goodwill is removed from accounts by charging to partner in new ratios.

d)   Retiring capital account is removed.

Retirement of partner Accounting Example

Three partner (A, B and C) share profit equally

Capital Account for each partner is = 50,000

Cash = 150,000

Goodwill Amount= 75,000

C retires from the Partnership

What would Accounting treatment of Goodwill and amount paid to retiring Partner?

Solution

Recognition of Goodwill Journal Entry

Date	Particulars	Dr	Cr
	Goodwill  A/c	75,000
	A  A/c		25,000
	B  A/c		25,000
	C  A/c		25,000

Removing Goodwill Journal Entry

Date	Particulars	Dr	Cr
	A  A/c	37,500
	B  A/c	37,500
	Goodwill A/c		75,000

                                                C’s Capital Account

Particulars	Dr.	Particulars	Cr.
Cash	75,000	Balance B/F	50,000
		Goodwill	25,000
	75,000		75,000

                                                     

                                                   A’s Capital Account

Particulars	Dr.	Particulars	Cr.
Goodwill Removed	37,500	Balance B/F	50,000
Balance C/F	37500	Goodwill	25,000
	75,000		75,000

                                                   B’s Capital Account

Particulars	Dr.	Particulars	Cr.
Goodwill Removed	37,500	Balance B/F	50,000
Balance C/F	37,500	Goodwill	25,000
	75,000		75,000

Capital withdrawal Journal Entry

Date	Particulars	Dr	Cr
	C A/c	75,000
	Cash A/c		75,000

                        

Statement of Financial Position (After Retiring)

Capital
A	37,500
B	37,500
Total	75,000
Cash (150,000-75,000)	75,000
	75,000