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Final Settlement to Retiring Partner

On retirement of a partner, the retiring partner’s capital account must be adjusted with his
  • Share of reserve
  • Share of profit or loss on revaluation
  • Share of goodwill

After adjustment of the above items, the balance standing to the Capital A/c of the retiring partner represents the amount payable to him. The continuing partners may discharge the whole claim at the time of retirement itself. In this case, the journal entry will be

Sometimes, the retiring partner agrees to retain some portion of his claim in the partnership as a loan. In this case the journal entry will be:


Illustration - 9


The Balance Sheet of X, Y and Z who share profits in the ratio of 2 : 3 : 1, as at 31st March, 2014 is given below:

Z retires on 1st April, 2014 and X and Y decide to share future profits and losses in the ratio of 3 : 2 and 50% is to be paid immediately to Z and the balance in two equal annual instalments together with interest @ 10% p.a.


Goodwill is to be valued at 2 years’ purchase of average profits of last three completed years. The profits were – 2010 - 2011: ₹ 90,000, 2011 - 2012: ₹ 1,80,000, 2012 - 2013 : ₹ 2,70,000.

A joint life policy for ₹1,20,000 taken out by the partners, on which premiums totalling ₹ 20,000 have been paid, has a surrender value of ₹ 12,000. JLP is not to appear in the books of the new firm.

Land and Building was found undervalued by ₹ 50,000 and stock was found overvalued by ₹ 16,000.


Provision for doubtful debts is to be made equal to 5% of the debtors.


Claim on account of workmen compensation is ₹ 16,000.


Required: Prepare the necessary ledger accounts and the Balance Sheet.







Working notes:


(i) Calculation of Gain / (Sacrifice) of share


(ii) Calculation of goodwill


A. Average profits = Description: 24340.png 


B. Firm’s goodwill = ₹ 1,80,000 x 2 = ₹ 3,60,000

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