Accounting for Partnership Firms: Admission, Retirement, and Death
Admission, retirement and death change the composition of the firm, so the same three adjustments recur: goodwill, revaluation of assets and liabilities, and redistribution of reserves.
Admission
- Compute the new profit-sharing ratio; sacrifice ratio = old share − new share. The incoming partner pays for goodwill in the sacrificing ratio.
- Goodwill brought in cash: Bank Dr, To Premium for Goodwill; then Premium Dr, To old partners' capital. If not brought in: new partner's capital Dr, To old partners' capital.
- Revaluation account records changes in asset and liability values; the profit or loss belongs to the old partners.
- Reserves and accumulated profits go to the old partners in the old ratio.
Retirement and death
- Gaining ratio = new share − old share; goodwill is compensated in that ratio.
- Revaluation profit, reserves and goodwill are shared by all partners including the retiring one, in the old ratio.
- On death, the deceased partner's share of profit till death is based on last year's turnover or average profits; the balance goes to the executor's account.
Worked example
A and B share 3:2. C is admitted for 1/5, taking 1/10 from A and 1/10 from B. New ratio: A 1/2, B 3/10, C 1/5; sacrifice ratio 1:1. Firm goodwill is ₹1,00,000, so C's share is ₹20,000, credited ₹10,000 each to A and B.
Traps
- Distributing goodwill in the new ratio instead of the sacrifice or gaining ratio.
- Crediting revaluation profit to the new partner.
- Forgetting to write off goodwill if it is not to remain in the books.
- In death cases, omitting the profit earned up to the date of death.