Retirement of Partner Notes1

Study Material & Notes for the Chapter 6

Partnership - Retirement of Partner


A.  Meaning of Retirement of a Partner

When one or more partners leave the firm and the remaining partners continue to do the business of the firm is called Retirement of a Partner.  Retirement of a partner means that the partner ceases to be a partner of the firm.  It results in reconstitution of the firm by which old partnership comes to an end and a new partnership among the continuing (remaining) partners comes into existence.

B. Effect

Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement and the partnership firm is reconstituted with new terms and conditions. At the time of retirement the retiring partner’s claim is settled.

C. Different ways a Partner may retire:
  1. With the consent of all partners (If all other partners agree to this retirement)
  2. As per the terms of the agreement (If there is an agreement to that effect…say partner will retire on 31-Mar-2022). The terms and conditions of retirement of a partner are normally provided in the partnership deed. If not, they are agreed upon by the partners at the time of retirement.
  3. At his/her own will i.e. If he/she has given his/her consent in writing to retire
D. Liability of the Retiring Partner - for the acts before Retirement Section 32(2)
  1. A retiring partner remains liable for all the acts of the firm up to the date of his retirement.
  2. However, a retiring partner may be discharged from his liability by an agreement between himself, third party and the continuing partners
E. Liability of the Retiring Partner - for the acts after Retirement Section 32(3)
  1. A retiring partner also continues to be liable to third parties for the acts of the firm even after his retirement until a public notice of his retirement is given.
  2. A public notice is served either by way of a notification in the Official Gazette or published in a English & Hindi Newspaper
F. Accounting issues at the time of Retirement
  1. Determination of New Profit Sharing Ratio and Gaining Ratio
  2. Adjustment for Goodwill
  3. Treatment of Reserves & Losses
  4. Revaluation of assets and liabilities
  5. Settlement of retiring partner’s dues
  6. New Capital of the Continuing partners
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