Retirement of a Partner – Settlement of Dues

Introduction

Retirement is the withdrawal of a partner from the firm. According to Section 32 of the Partnership Act, a partner can retire with the consent of all other partners or by giving notice (in partnership at will). The retiring partner is entitled to get back his Capital, share of Goodwill, share of Reserves, and Profit/Loss on Revaluation.

1. Amount Payable to Retiring Partner

To determine the amount due, we prepare his Capital Account with the following adjustments:

Credits (Items Payable):

1. Opening Capital Balance.
2. Share of Goodwill (Paid by Gaining Partners).
3. Share of Reserves/Accumulated Profits.
4. Share of Profit on Revaluation.
5. Salary/Interest accumulated till date of retirement.
6. Share of Profit till the date of retirement (if retirement is mid-year).

Debits (Items Deducted):

1. Drawings/Interest on Drawings.
2. Share of Accumulated Losses.
3. Share of Loss on Revaluation.

2. Modes of Settlement

Once the final amount due is calculated (say ₹5 Lakhs), the firm can pay it in 3 ways:

A. Lump Sum Payment (Immediate)

Retiring Partner's Capital A/c ...Dr   (Amount)
    To Bank A/c                            (Amount)

B. Transfer to Loan A/c (Deferred)

If the firm has no cash, the amount is treated as a Loan.

Retiring Partner's Capital A/c ...Dr   (Amount)
    To Retiring Partner's Loan A/c         (Amount)

(He earns 6% pa interest on this balance).

C. Partial Payment

Pay some cash, transfer rest to Loan.

3. Section 37: Right to Share Subsequent Profits

If the firm fails to pay the amount due to the retiring partner immediately, he has an option to choose whichever is beneficial:

1. Interest @ 6% p.a. on outstanding amount. OR
2. Share of profit earned using his capital (Proportionate Profit).

This section protects retiring partners from delay in settlement.

Exam Notes: Writing the Answer

Question: "Explain the modes of settling the account of a retiring partner." (5 Marks)

Model Answer:

The amount due to a retiring partner represents the sum total of his capital, share in reserves, revaluation profit, and goodwill. It can be settled as:

1. Immediate Cash: By paying the full amount relative to Bank.
2. Partner's Loan Account: The amount is transferred to a Loan Account, which appears as a liability in the Balance Sheet. Interest @ 6% p.a. is mandatory unless agreed otherwise.
3. Installments: Paying principal plus interest over a few years.

Section 37: If settlement is delayed, the retiring partner can claim either 6% Interest or a share in subsequent profits.

Summary

• Due: Capital + Goodwill + Reserves.
• Payment: Cash or Loan.
• Interest: 6% p.a. on Loan.
• Revaluation: Prepared exactly like Admission (Profit shared in Old Ratio).

Quiz Time! 🎯

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