Study Material & Notes for the Chapter 6
Partnership - Retirement of Partner
VI. ADJUSTMENT OF CAPITAL
- Sometime, at the time of retirement, the remaining partners’ agree that their capitals be adjusted
- To begin with, New Capital of the reconstituted Firm is determined
- The partners may decide to keep the New Capital at the same level as it was there in the business before retirement of partner or decide a lump-sum figure
- New Capital can be equal to combined adjusted closing capital of remaining partners or with addition towards shortage of the amount payable to retiring partner + desired cash balance to be maintained in business
- For this purpose, the capital accounts of the existing partners are prepared, making all adjustments, on account of goodwill, free reserves , accumulated losses and revaluation of assets/reassessment of liabilities.
- The actual capital so adjusted will be compared with the amount of capital that should be kept in the business after the admission of the new partner.
- The excess if any, of adjusted actual capital over the proportionate capital will either be withdrawn or transferred to current account and vice versa.
Methods of Capital Adjustment
I. When Total Capital of the New Firm is Given
Step-1 Firm’s Total Capital = Given in the Question already
Step-2 Specific Partner’s New Capital
= Firm’s Total New Capital (as per Step-1) X Specific Partner’s Share per new PSR
Step-3 Specific Partner’s Existing Adjusted Closing Capital
= Old Capital +(-) Adjustments of Goodwill, Reserves & Accumulated losses
Step-4 Capital to be introduced/ withdrawn
= Specific Partner’s New Capital – Specific Partner’s Existing Adjusted Closing Capital
II. When Total Capital of the Remaining Partners is to be in their New Profit-Sharing Ratio
Step-1 Firm’s Total Capital = Combined Adjusted Closing Capital of remaining partners
Step-2 Specific Partner’s New Capital
= Firm’s Total New Capital (as per Step-1) X Specific Partner’s Share per new PSR
Step-3 Specific Partner’s Existing Adjusted Closing Capital
= Old Capital +(-) Adjustments of Goodwill, Reserves & Accumulated losses
Step-4 Capital to be introduced/ withdrawn
= Specific Partner’s New Capital – Specific Partner’s Existing Adjusted Closing Capital
III. When Total Capital of New Firm is equal to Total Capital before retirement of a partner
Step-1 Firm’s Total Capital = Total Capital of all the Partners including retiring partner before adjustments (as per Balance Sheet given)
Step-2 Specific Partner’s New Capital
= Firm’s Total New Capital (as per Step-1) X Specific Partner’s Share per new PSR
Step-3 Specific Partner’s Existing Adjusted Closing Capital
= Old Capital +(-) Adjustments of Goodwill, Reserves & Accumulated losses
Step-4 Capital to be introduced/ withdrawn
= Specific Partner’s New Capital – Specific Partner’s Existing Adjusted Closing Capital
IV. When the Retiring Partner is paid through amount brought by the remaining partners in a manner to make their capitals proportionate to their New Profit-sharing Ratio
Step-1 Firm’s Total Capital = Combined adjusted closing capital + Shortage of the amount to be paid to retiring partner
Step-2 Specific Partner’s New Capital
= Firm’s Total New Capital (as per Step-1) X Specific Partner’s Share per new PSR
Step-3 Specific Partner’s Existing Adjusted Closing Capital
= Old Capital +(-) Adjustments of Goodwill, Reserves & Accumulated losses
Step-4 Capital to be introduced/ withdrawn
= Specific Partner’s New Capital – Specific Partner’s Existing Adjusted Closing Capital
V. When the Retiring Partner is to be paid through amount brought by the Remaining partners in a manner to make their Capitals proportionate to their New Profit-sharing Ratio and also leave a desired Cash Balance
Step-1 Firm’s Total Capital = Combined adjusted closing capital + Shortage of the amount to be paid to retiring partner + Desired Cash balance
Step-2 Specific Partner’s New Capital
= Firm’s Total New Capital (as per Step-1) X Specific Partner’s Share per new PSR
Step-3 Specific Partner’s Existing Adjusted Closing Capital
= Old Capital +(-) Adjustments of Goodwill, Reserves & Accumulated losses
Step-4 Capital to be introduced/ withdrawn
= Specific Partner’s New Capital – Specific Partner’s Existing Adjusted Closing Capital
Journal Entries
a. When excess amount is withdrawn by the partner or transferred to current
a. When excess amount is withdrawn by the partner or transferred to current
