Partnership Accounts: Admission, Retirement, Death and Dissolution
Partnership Accounts tests admission, retirement, death and dissolution with correct profit-sharing and capital adjustments.
Core rules
- Admission: new partner gets share from old partners; sacrifice ratio = old share − new share. Goodwill brought in by the new partner is credited to sacrificing partners. Revaluation profit/loss and accumulated reserves are shared in the old ratio.
- Retirement/death: gaining ratio = new share − old share. Revalue assets/liabilities, credit goodwill to retiring partner, transfer reserves in old ratio, settle the retiring partner's account or transfer to executor.
- Dissolution: open a Realisation account to record sale of assets and payment of liabilities; close partners' capital accounts; surplus cash is paid to partners.
Worked example
X and Y share 3:2 and admit Z for 1/5. Sacrifice: X 3/5 × 1/5 = 3/25; Y 2/5 × 1/5 = 2/25. New shares: X 15/25 − 3/25 = 12/25; Y 10/25 − 2/25 = 8/25; Z 5/25. Goodwill ₹50,000; Z brings ₹10,000, credited X ₹6,000 and Y ₹4,000.
Traps
Use the new ratio for future profits but the old ratio for pre-admission reserves; do not give the new partner a share of past goodwill unless agreed; a revaluation loss is debited to old partners; do not open Realisation account for admission or retirement.