Retirement and Death of a Partner

23/01/2021 0 By indiafreenotes

A partner may ascertain to either withdraw or retire from the enterprise due to certain reasons such as his bad health, his age, change in enterprise’s nature of a business, etc., In the Partnership at Will, a partner might retire at any time. Retirement leads to a reconstitution of an enterprise where the partners’ contribution ratio and the profit-sharing ratio change. The retiring partner is given his share of capital, revaluation profit or loss and goodwill.

Death or insolvency of a partner is the outcome in the reconstitution of an enterprise when the remaining partners desire to continue the enterprise. In case of bankruptcy or insolvency, all dues are paid to the bankrupt partner and partnership agreement is terminated as per the law a bankrupt is ineffectual to get into an agreement or a contract. In the case of decease, all dues are being paid to the legal successor of the deceased partner.

Treatment of Reserves, Accumulated Profits and Accumulated Losses in the Case of Death of a Partner

Reserves, Existing Goodwill, accumulated profits/losses appearing in the Balance Sheet of the firm at the time of death of a new partner belong to all partners including the retiring or deceased partner. Hence these should be distributed among all the partners in their old profit-sharing ratio.

Following Journal Entries Are Required to Be Passed:
(1) Distribution of Existing Goodwill  All Partners’ Capital A/c  Dr.

         To Goodwill A/c 

(2) Distribution of Reserves  Reserve fund/General Reserve A/c  Dr. 

     To All Partners’ Capital A/c 

(3) Distribution of Accumulated Losses  All Partners’ Capital A/c  Dr.

    To Profit & Loss A/c

(4) Distribution of Accumulated Profits  Profit & Loss A/c  Dr.

   To All Partners’ Capital A/c

The Retirement of an Existing Partner

A partner may decide to retire or withdraw from the firm due to reasons such as his age, his bad health, change in firm’s nature of a business, etc. In case of Partnership at Will, a partner may retire at any time. Retirement amounts to a reconstitution of a firm where the number of partners, their capital contribution ratio and also the profit sharing ratio changes. The retiring partner is paid his share of capital, goodwill and revaluation profit or loss.

For example, A, B, and C are partners in the firm sharing profits in the ratio of 3:2:1. A chooses to retire and B and C decide to share the future profits equally. This is a reconstitution of the firm where the number of partners and their profit-sharing ratio both have changed.

Death or Insolvency of a Partner:

Death or insolvency of a partner also results in the reconstitution of the firm when the remaining partners wish to continue the firm. In case of insolvency, all dues are paid to the insolvent partner and partnership agreement is aborted because as per the law an insolvent is incompetent to enter into a contract or an agreement.

In case of death, all dues are paid to the legal heir of the deceased partner.

The accounting treatment in the occurrence of death of a partner is:

  • Similar to that, when a partner retires and that in case of deceased partner his belonging is transferred to his legal enforcers and settled in a similar way as that of the partner who retires
  • However, there is one primary distinction, the retirement usually takes place during the closure of an accounting period or financial year, the death of a partner may take place any time
  • Therefore, in the case of a partner, his rights shall also incorporate his share of gains or loss, interest on drawings (if any), interest on capital from the last date of the Balance Sheet to the date of his death of these, the main issue associates to the computation of profit for a moderate period
  • Since, it is contemplated burdensome to close the books and outline final a/c, for the period, the dead partner’s share of profit may be computed on the ground of previous year’s gain (or aggregate of past few years) or on the base of sales
(a) Linking Death of a Partner with Retirement of a Partner
(a) Common accounting treatment in case of Retirement of a Partner and Death of a Partner: (Assuming retirement to be on the date of Balance Sheet)

  • Partners Capital Balance
  • Existing goodwill
  • Partner’s share in the present value of Firm’s Goodwill
  • Revaluation Profit or Loss
  • Reserves, Surplus and Fictitious Assets
  • Drawings made by the partner
  • Asset/Liability taken over by a partner
  • Partner’s Loan given on Assets side or Liabilities side
(b) Special accounting treatments required in case of Death of a Partner only:
  • Salary/Commission to a Partner
  • Interest on Capital
  • Interest on Drawings
  • Interest on Loan
  • Share in current year’s Profits
  • Accounting treatments at the time of Death of a Partner is an extension of the Retirement of a Partner. In the above-mentioned list, treatment of category ‘A’ items is exactly the same both for retirement & death. There will be no effect of date of death.
  • But for the treatment of category ‘B’ items date of death plays a very important role.


(B) Calculation of Category ‘b’ Items:
i. Salary to the deceased partner:
  • Monthly Salary x Time Period
  • Commission as per the agreement for this period only (if any).

# Time Period = Period from the date of last Balance Sheet to the date of Death

{This period can be in months, weeks or days.}

(B) Calculation of Category ‘b’ Items:
  • Capital Balance as per the last Balance Sheet x Rate of Int./100× Time Period/12
iii. Interest on Drawings
  • We’ll use the rules of Interest on Drawings learned earlier and of course, keep in mind the ‘Time Period’.
iv. Interest on Loan
  • Amount of Loan as per the last Balance Sheet x Rate of Int./100× Time Period/12
v. Share in Current Year’s Profits
  • To compute the deceased partner’s share in estimated profits there are following two approaches/basis:
  • Time Basis: Under this approach his profit share for the current year is computed on the basis of last year’s profit or last few years’ average profits.
  • Formula: Last Year’s Profit × Time Period/12 × Deceased Partner’s Share


Average Profits × Time Period/12 × Deceased Partner’s Share

  • Turnover Basis– In this case, his profit share for the current year is estimated using last year’s sales and last year’s profits.
  • Formula: Step 1. Compute Profits % of last year: Last Year’s Profit/Last Year’s Sales × 100

Step 2. Firm’s estimated profit till the date of death: Current Year’s Sales up to the date of death × Profit %

Step 3. Decease Partner’s share

Firm’s Profit as per Step 2 × Deceased Partner’s ratio