Retirement of a partner
When one of the partners retires ante the others will continue trading, the n it is important that he gets a share of the goodwill that he helped create in addition to the total amounts due to him from the partnership.
To ensure that this objective is achieved, the following entries are normally passed in the partners capital accounts.
DR. Goodwill
CR. Partners capital accounts
(With the value of goodwill to all the partners capital accounts according to old PSR)
To write off the goodwill:
DR. Partners capital accounts
CR. Goodwill
(With the total value of goodwill and in only capital accounts of remaining partners using new PSR)
To get the total due to a retiring partner, we find out the balance in the current accounts and any loans advanced in the partnership and the balances in these accounts are transferred to the capital accounts.
Incase the partner has retired partway during the financial year, then we update the current account first with the partners share of the profits as per profit and loss appropriation account up to the date of retirement.
The partnership may not have sufficient cash to pay the retiring partner and thus may agree with the retiring partner that his total dues from the partnership be converted into a loan paying a certain interest per annum. However, if the partnership is able to pay the amount due, the retiring partner then the following entry is passed:
DR. Retiring partners capital accounts
Cr. Cash book