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The retirement of a partner extinguishes his interest in the Partnership firm and this
leads to dissolution of the firm or reconstitution of the Partnership. A partner, who goes out of
a firm, is called retiring partner or outgoing partner. Causes for the retirement may be that a
retiring partner may be too old or he may have better opportunity in a different line or he may
dislike the co-partners attitude or any other reasons.

The following are the ways in which a partner can retire:

1. With the consent of all the other partners,

2. In accordance with an express agreement among the partners,
3. By giving a written notice of intention to retire to all the other partners where
partnership is at will.


When a partner retires his share in the properties of the firm has to be ascertained and
paid off. Certain adjustments have to be made in order to ascertain the amount he is to get
from the firm.

These adjustments are very similar to those which we saw in connection with
admission of a partner. When a partner retires from the business, it becomes necessary to
prepare the accounts so as to ascertain the amount payable to him.

When a partner retires, the following adjustments must be made:

1. Adjustment of accumulated reserves and undistributed profit and losses.

2. Revaluation of assets and liabilities.

3. Adjustment for goodwill of the firm.

4. Calculation of new profit and loss sharing ratio.


Any reserves or undistributed profits appearing on the liability side of the Balance
Sheet, at the time of retirement, are past profits, which are created to strengthen the financial
position of the firm the retiring partner has a right over such profits. Therefore, it is necessary
to divide the accumulated reserve or undistributed profit among all the partners in their old
profit or loss sharing ratio. When the distribution is over, they do not appear in the Balance

The journal entries are:

General Reserve Account Dr.

Profit and Loss Account Dr.

To All Partners Capital Account

(Being transfer of General Reserve and profit in the old profit sharing ratio)

Alternatively, instead of transferring the entire reserve or profit, only the share of the
Retiring Partner may be transferred to the Retiring Partners Capital Account. The balance in
the reserve or profit account continues to appear on the liability side, at reduced amount.

In case the firm has incurred any losses in the past and the losses were not adjusted so
far to the capital accounts, then such losses, which is found in the asset side of balance sheet,
be transferred to the Retiring Partners Capital Account, to the extent of his share. By doing
so, the losses continue to appear on asset side of the Balance Sheet, at a reduced amount.


The valuation of goodwill may be done according to the provisions of the Partnership Deed
and in the manner as in case of admission by any one of the following methods:

A. When Goodwill does not appear in the books:

Illustration 1:

A, B and C were partners in a firm with capitals of Rs 10,000, Rs 8,000 and Rs 6,000
respectively and sharing profits and losses in the ratio of 3 : 2 : 1. On 31st December 2005, B
retires. For the purpose of retirement, the goodwill of the firm was valued at Rs 18,000.

Pass necessary journal entries under the following circumstances and also find out the
amount payable to B:

a) Total goodwill raised and maintained in the books.

b) Total goodwill raised but written off later.

c) Only Bs share of goodwill is raised and maintained in the Books.

d) Only Bs share of goodwill is raised but later on written off.

e) B is given his share of goodwill without raising Goodwill Account.

Illustration 2:

(a) A, B and C are equal partners. Goodwill appears in the books at Rs 10,000. C retires and
goodwill is revalued at Rs 15,000. Now A and B decide to share future profits and losses m
the ratio of 3. 2

(b) X, Y and Z are partners sharing profits in the ratio of 4: 3: 3. Goodwill does not appear in,
the books. Z retires from the firm and his share of goodwill is estimated to be Rs. 6,000,
which was purchased by X and Y in equal proportion. X and Y decide not to open Goodwill

(c) Ram, Mohan and Moni were partners sharing profits in the ratio of 2: 2: 1. On 1st January
2005, their goodwill was valued at Rs 30,000 and there is no Goodwill Account appearing m
the books. Mohan ordered No goodwill is to appear in the books.


A capital account records the partners equity investment at any point in time. It is
credited initially with the fair market value of the assets contributed by the partner at the time
of formation of the partnership; subsequent changes reflect the partners share of net income
earned, additional assets invested, and assets withdrawn. A partners loan account would be
used to record amounts borrowed from or loaned to the partner.1 Finally, a drawings account
is used to record cash withdrawals in anticipation of yearly profits. This account is similar to
the dividend account used by corporations and is closed to the partners capital accounts at
the end of the accounting period.