Admission, Death, Retirement of a Partner – Partnership Accounting

In this article we will discuss about admission of new partner, death and retirement of a Partner – Partnership Accounting.

Admission of a New Partner

Section 31 of the Partnership Act deals with the statutory provision regarding the admission of a new partner. These provisions are summarized below: Partnership Accounting

1. A new partner cannot be admitted without the consent of all the partners unless otherwise agreed upon.
2. A new partner admitted to an existing firm is not liable to any debts of the firm incurred, before he comes in as a partner.

The new partner cannot be held responsible for the acts of the old partners unless it is proved that.

1. The reconstituted firm has assumed the liability to pay the debt.
   1. That the creditor has agreed to accept the reconstituted firm as his debtor and to discharge the old firm from liability.

A newly admitted partner shall be liable only for the debts incurred or transactions entered into by the firm subsequent to his becoming a partner.

Accounting Problems: On admission of new partner can be put as follows:

1. Adjustment in the profit sharing ratio.
2. Adjustment for goodwill.
3. Adjustment for revaluation of assets and liabilities.
4. Adjustment for reserves and accumulated profits.
5. Adjustment for capital.

Retirement, Death and Amalgamation: Retirement of Partner:

Section 32 of the partnership Act deals with the statutory provisions relating to retirement of a partner from partnership firm – Partnership Accounting.

Provisions are:

1. A partner may retire from the firm.
   1. In accordance with an express agreement or
   1. With consent of all other partners, or
   1. Where the partnership is at will, by giving a notice in writing to all the other partners of his intention to retire.
2. A retiring partner may carry on business competing with that of the firm and may advertise such business. But he has no right to:
   1. Use the name of the firm.
   1. Represent himself as carrying on the business of the firm, or
   1. Solicit the custom of the old customers of the firm except when he obtain these rights by an agreement with the other partners of the firm.
3. A retiring partner will not be liable for liabilities incurred by the firm after his retirement. However, he must give a public notice to that effect.
4. Retirement of a partner by death or insolvency also does not require any public notice.

Death of Partner – Partnership Accounting:

According to section 35 of the Partnership Act, a partnership firm may not be dissolved on the death of partners – Partnership Accounting.

In the event of death of a partner, the legal representatives of the deceased partner will be entitled to get from the firm, amounts due on account of the following:

1. Capital standing to the credit of the deceased partner on the date of his death.
2. Share of goodwill.
3. Profit on revaluation of assets and liabilities as reduced by any loss on any such revaluation.
4. Share out of the proceeds of a joint life insurance policy.
5. Share out of the reserves or other undistributed profits.
6. Share in profits of the firm earned by the firm from the date of beginning of the year to the date of his death.
7. Interest on capital from the beginning of the year to the date of his death.

ADMISSION, RETIREMENT AND DEATH OF PARTNERS

1. Distinguish between Sacrificing Ratio and Gaining Ratio?

Sacrificing Ratio This is the ratio which old partners  sacrifice  towards the new partner.	Points of Difference Meaning	Gaining Ratio This is the ratio which the existing partners get from the returning partner.
Calculated at the time of admission	Occasion	Calculated at the time of retirement.
Old Ratio – New ratio	Calculation	New ratio – Old Ratio
Used to share Goodwill Premium brought in by new partner among old partners.	Use	Used to determine compensation payable to the retiring partner by the continuing Partners.

What is Joint Life Policy ? What is the objective of laking JLP by partners. Explain the methods of its treatment ? JLP is taken on the lives of the partners collectively. This ensures liquidity to the firm at the death. Methods of treatment.

• Premium paid is treated as an expense of firm
• Premium paid is treated as an asset at its surrender value
• Premium paid is treated as an asset and JLP reserve a/c is maintained.

How will you compute the amount payable to a deceased/retiring partner?

• The balance of his capital a/c
• Share of Goodwill
• Share of accumulated profit / Loss
• Share of Profit/Loss on revaluation
• Share of profit from the date of closing last final accounts to the date of retirement / death.
• Interest on capital from the date of last balance sheet to the date of retirement / death.

Explain the various methods of computing the share of profits in the event of death of a partner.

• On the basis of Time and
• On the basis of sale

State the occasions on which reconstitution of partnership firm can take place.

• Change in profit sharing ratio
• Admission of a new partner
• Retirement of an existing partner
• Death of a partner
• Amalgamation of partnership firm.

A:B:C, 4:3:2, Goodwill was valued at Rs.18,000. B decided to retire and it is decided to adjust B’s share of GW between A and C in the ratio of 5:3 without opening GW a/c Pass JE.

            GR = NR – OR 

            A =

            C  =            

            GR = 13 : 11

            A’s capital a/c                        Dr. 3250

            C’s Capital a/c                       Dr. 2750

                        To B’s Capital                       6000

            (Being goodwill adjusted without opening GW a/c)

• A:B:C  5:3:2 tookout a JLP  for Rs.18,000 paying an annual premium of Rs.720 starting from 1^st Jan 1994. The  surrender value of the policy was  as follows:

1994 – Nil, 1995-Rs.240, 1996 – Rs.600, 1997-1020, 1998-Rs.1800.

B died on 6^th Oct. 1997 and insurance company paid Rs.18720 including bonus on 30^th Nov. 1997. The books were closed on Dec. 31 each year. Show the accounts relating to JLP when surrender values are to be treated as an asset.

Joint Life Policy a/c

1994, Jan 1, To Bank              720.00	1994, 1 Dec, 31  per a/c          720
1995 Jan 1, To Bank               720.00	1995, Dec, PandL a/c                  480
720.00	” By Balance c/d                       240
1996, Jan 1, To Balance b/d           240	Dec. 1996, 31
To Bank                                          720	By P and L a/c                              360
	By Balance c/d                          600
960	960
1997, Jan 1 To Balance b/d            600	1997, Oct, 6, By Bank          18720
To Bank                                          720
To A             8700
B                  5220 C                  3480                       17400
18720	18720

A:B  3:2 This capitals were Rs.80,000 and Rs.60,000 They admitted C for 1/5^th share. C brought Rs.60,000 as his capl. Calculate the value of GW (Goodwill) of the firm and record necessary JE (Journal Entry) on C’s admission.

            C’s capital Rs.60,000

            Total capital of the firm – 5 x Rs.60,000 = Rs.3,00,000

            Combined capital of A+B+C = 80,000 + 60,000 + 60,000

                                                            = Rs.2,00,000

            Hidden GW =  3,00,000 – 2,00,000 = Rs.1,00,00

            C’s share of GW . 1/5 x 1,00,000 = Rs.20,000

            Bank a/c                                             Dr.       60,000

                  To C’s capital                                                60,000

            (Being Capital brought in by C)

            C’s Capital a/c                                  Dr 20,000

                To A’s Capital                                               12000

                To B’s capital                                                8000

            (being adjustment entry for GW