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in Reconstitution of a Partnership Firm – Retirement/Death of a Partner by (25.6k points)
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How will you calculate the amount payable to a retiring partner?

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If retirement takes place on the closing date of the accounting year ascertainment of profit or loss is easy. But if the retirement occurs during an accounting year, the profit or loss from the date of last Balance Sheet to the date of retirement is also to be determined. Partnership deed provides the method of calculating the profit or loss of that period. It is calculated by any of the following methods.

1. On the basis of the last year’s profit. 

2. On the basis of the average profit of a certain » number of past years. 

3. By providing interest on the capital .of the retiring partner at. a certain rate. 

4. By finding out the correct profit till the retirement date. 

5. On any other basis as provided in the partnership agreement.

The profit or loss calculated above is only an estimate. So the journal entry for the same is; In case of profit. 

Profit and Loss Suspense A/c Dr. To Retiring Partner’s Capital A/c:

P&L suspense A/c is shown on the asset side of the Balance Sheet prepared immediately after retirement. At the end of the accounting year; it is closed by transferring to Profit and Loss Account. Reverse is done in case of loss.

For calculating, the total amount payable to the retiring partner, his capital account is prepared

It is started with the balance in the same on the last. 

Balance Sheet and credited with:

  • His share of goodwill. 
  • His share of revaluation profit. 
  • His share of accumulated profits and reserve. 
  • His share of profits up to the retirement date since the last Balance Sheet. 
  • Interest, salary or commission if any due to him.

 The capital account is debited with:

  • His share of accumulated losses. 
  • His share of revaluation loss. 
  • His drawings if any during the period. 
  • Interest on such drawings. 
  • His share of loss up to the retirement date since the last Balance Sheet.

If the account shows a credit balance, it is the total amount payable to him. On the other hand, if the account has a debit balance, it represents the amount payable by him to the firm. 

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