Ascertaining the amount due to retiring/deceased partner - class-XII

The amount of general reserve is transferred to the capital accounts of all the partners in their old profit sharing ratio. This is done to give the deceased partner's nominee the required amount of share in profits of the firm. So, All Partners' Capital Accounts are credited with their respective shares.

Business of a partnership firm may not come to an end due to the death of a partner. Other partners may shall continue to run the business of the firm. Readjustments takes place in case of death of a partner likewise the case of retirement of a partner. Whenever, a partner dies the continuing partners make gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to b paid to discharge the claim of deceased partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account. Revaluation of profit and reserves are transferred to capital or current accounts of partners. Lastly, final amount due to the retiring partner is determined and discharged.

There are two ways in which amount due to deceased partner is discharged:

1. Lump sum payment method - In this, if the firm has sufficient cash to pay off the amount due to the deceased partner, it pay the amount immediately, this is known as lump sum payment method.

2. Installment payment method - In this, if the firm  does not have sufficient cash to pay off the amount due to deceased partner, it pay the amount in installments, this is known as installment payment method.

On retirement of a partner following accounts are prepared:

Retirement or death of a partner also leads to reconstitution of a partnership firm. On the retirement or death of a partner, the existing partnership deed comes to an end and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions.

The surrender value at the time of the death of a partner is distributed among the remaining partners and the legal representative of the deceased partner.

The amount received from a Joint Life Policy on the death of a partner is a gain for the firm, so it is distributed among all partners in their profit-sharing ratio.

Profit of the accounting year 2014 - 2015 = Rs. 24000

When a partner retires, the remaining partners' profit-sharing ratio must change to account for the redistribution of the retiring partner's share.

If a partner retires, without giving public notice, he  continues to be liable as a partner by holding out. If a Dormant partner retires without giving any public notice, he cannot be held liable as a partner by holding out. If no notice of retirement of a partner is given to the third parties and, if they continue to supply goods or funds to the reconstituted firm, they can either hold th old firm or the new firm liable.

A partner can retire with the consent of all partners, per an express agreement, or by giving notice if the partnership is at will.

In accordance with the Partnership Deed, a partner is said to retire when other partners continue to carry on the partnership business and that partner who retires ceases to be a partner. There are three modes of retirement of a partner, which are as follows:

In a partnership, a partner may retire: With the consent of all the partners, In accordance with an express agreement by the partners, or. The partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

The heir of a deceased partner does not have an automatic right to become a partner; they can only join if the surviving partners consent.

gaining ratio = new ratio-old ratio 

When Joint Life Policy premium is treated as an expense, then it is closed every year by transferring it to profit and loss A/c and the amount reserved on the death of the partner is transferred to partner's capital A/c.

A Joint Life Policy (JLP) is an insurance policy which is taken out by the partnership firm on the joint lives of all partners. The amount of policy is payable by the insurance company either on the death or maturity of policy, whichever is earlier. The firm pays annual premium to the insurer against the policy. Joint Life Policy is taken by the partners so that to avoid the financial hardship they may face at time of payment to retiring or deceased partner.

Old ratio (R, J and D) = 7 : 5 : 4

If the Joint Life Policy is maintained at surrender value, the policy is already recorded as an asset. Upon receiving the full maturity value, the difference between the maturity value and the surrender value is treated as a gain and distributed.

When a JLP Reserve exists alongside the JLP asset, the reserve is typically closed by transferring it to the partners' capital accounts in their old profit-sharing ratio.

When a Joint Life Policy (JLP) is surrendered, the cash received is credited to the JLP account to close it. The balance remaining in the JLP account is then transferred to the partners' capital accounts in their old profit-sharing ratio.

The JLP appears in the balance sheet at 10,000 but only 7,500 is received. The loss of 2,500 must be borne by the partners in their profit-sharing ratio, which can be debited to the Revaluation account or directly to the capital accounts.

Readjustments takes place in case of retirement of a partner. Whenever the partner retires, the continuing partners makes gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to be paid to discharge the claims of the retiring partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account. Revaluation profit and reserve are transferred to capital or current accounts of partners. Lastly, final amount due to retiring partner is determined and discharged.

Liability of a retired partner - A retired partner is held liable to the debts of his firm and for all the acts of the firm done before and upto the date of his retirement. However, a retiring partner may be discharged from his liabilty to any third party for the acts of his firm done before his retirement by entering into agreement with such third party and partners of the reconstituted firm. Such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of retirement. Thus a third party should recognise the reconstituted firm as its debtor in order to free the retiring partner from his liability.

At the death of a partner, all of the assets and liabilities have to be revalued and the resultant profit or loss has to be transferred to capital accounts of all partners including the deceased partner. Goodwill is raised and the joint life policy, if any, is taken into consideration. Lastly, final amount due to the deceased partner is determined and it should be credited to his Executor's Account.

If Joint Life Policy appears in the Balance Sheet at surrender value, then the firm will gain on the death of a partner and partners will get

The share of profit for a deceased partner from the last balance sheet date to the date of death is calculated and debited to the Profit and Loss Suspense account, with the credit going to the deceased partner's capital account.

Old ratio (R, J and D) = 7 : 5 : 4

Profit sharing ratio of A, B and C is 5 : 3 : 2

A Joint Life Policy Reserve represents accumulated profits. Upon the retirement of a partner or surrender of the policy, this reserve is distributed among all partners in their old profit-sharing ratio.

Creation of Joint Life Policy Reserve Account - Under this method, premium paid is debited to policy account and credited to bank A/c. At the end of the year, amount equal to premium is transferred from profit and loss appropriation A/c to policy reserve A/c. After this, policy A/c is brought down to its surrender value by debiting the life policy reserve A/c with amount which exceeds the surrender value of policy. Thus, in this method, policy account appears on the assets side and policy reserve account appears on the liabilities side of the balance sheet until it is realised. Both these accounts appear in the balance sheet at the surrender value of policy. 

On death of partner,  representative of deceased partner is entitled to the partner's share of profit from the beginning of the year to the date of the death.