1. Settlement of Retiring Partner's Dues
Once the retiring partner's final Capital Account balance is determined (after goodwill credit, revaluation profit/loss, reserve share), the firm settles the amount due. Three methods:
| Mode | Journal Entry | Implications |
|---|---|---|
| Full cash payment | Dr Retiring Partner's Capital A/c | Cr Bank A/c | Firm's cash reduces; Capital A/c closes to nil |
| Partial cash + Loan A/c | Dr Retiring Partner's Capital A/c (full balance) Cr Bank A/c (cash portion) Cr Retiring Partner's Loan A/c (balance) |
Unpaid balance becomes a loan; interest accrues on Loan A/c at agreed rate |
| Transferred fully to Loan A/c | Dr Retiring Partner's Capital A/c | Cr Retiring Partner's Loan A/c | Entire balance becomes a secured loan to the firm; interest at agreed rate each year |
Interest on Retiring Partner's Loan
Interest is charged to P&L Account each year and credited to the Loan Account:
Dr P&L A/c | Cr Retiring Partner's Loan A/c (interest amount)
Worked Example
B retires. B's final capital balance = ₹75,000. Firm pays ₹30,000 cash immediately; balance kept in B's Loan A/c at 9% p.a.
Journal Entry 1 (settlement):
Dr B's Capital A/c ₹75,000 | Cr Bank A/c ₹30,000; B's Loan A/c ₹45,000
Journal Entry 2 (interest next year):
Dr P&L A/c ₹4,050 | Cr B's Loan A/c ₹4,050 (₹45,000 × 9% = ₹4,050)
2. Capital Adjustment of Continuing Partners
After retirement, the remaining partners' capitals may not be proportionate to their new profit-sharing ratio. Adjustment is done using the same method as at admission:
Total Required Capital = One Partner's Actual Capital ÷ That Partner's New Share
Each partner's required capital = Total × Their New Share. Excess is withdrawn; deficit is brought in (or adjusted via Current A/c).
3. Death of a Partner
The death of a partner has the same financial effect as retirement — but it occurs mid-year (usually) and involves the estate/legal heirs rather than the partner themselves. The Executor's Account (also called Legal Representative's Account) records all amounts due to the deceased's estate.
Executor's Account — Items on Credit Side (amounts due to estate)
| Item | How Calculated |
|---|---|
| Capital Account balance | Opening capital + any fresh capital introduced in the year |
| Share of Goodwill | Firm's goodwill × deceased's old ratio share. Borne by remaining partners in gaining ratio. |
| Share of Revaluation Profit | If assets/liabilities revalued at death; deceased gets old ratio share |
| Share of Accumulated Reserves | General Reserve etc. × deceased's old ratio share |
| Share of profit to date of death | Profit estimated from date of last balance sheet to date of death. Two methods: (i) Time basis: Annual profit × months/12 × deceased's ratio (ii) Sales basis: Profit proportionate to sales in that period |
Executor's Account — Debit Side (amounts recovered)
- Drawings made by partner before death
- Interest on drawings
- Share of revaluation loss (if any)
- Balance due to executor (final payment by firm)
Worked Example — Death of a Partner
A, B, C share profits 3:2:1. B dies on 1st October (after 6 months of financial year starting 1 April). Year's expected profit = ₹96,000. Firm's goodwill = ₹60,000. B's capital = ₹70,000. General Reserve = ₹30,000. GR (continuing A:C) calculated as before.
B's share of profit (time basis): ₹96,000 × 6/12 × 2/6 = ₹16,000
B's goodwill share: ₹60,000 × 2/6 = ₹20,000
B's General Reserve share: ₹30,000 × 2/6 = ₹10,000
| B's Executor's Account | |||
|---|---|---|---|
| Dr | ₹ | Cr | ₹ |
| Balance (final payment) | 1,16,000 | Capital A/c | 70,000 |
| Goodwill (2/6 × 60,000) | 20,000 | ||
| General Reserve | 10,000 | ||
| Share of Profit to date | 16,000 | ||
| Total | 1,16,000 | Total | 1,16,000 |
