Question

What adjustments are required to be made at the time of retirement of a partner?

Hint:

At the time of retirement, it is important to ensure that the retiring partner receives a fair share of the business, including their share of goodwill, revalued assets, and reserves.

Answer 1

Step 1: Adjustments in Capital Accounts.
At the time of retirement, the following adjustments are generally made:
Step 2: Necessary Adjustments.
1. Settlement of the Retiring Partner's Share: The retiring partner’s share of capital, reserves, and profit must be settled. This includes any goodwill, capital balances, and accumulated profits or losses.
2. Goodwill Adjustment: Goodwill is adjusted among the remaining partners based on the agreed-upon method (e.g., sacrifice ratio). The retiring partner’s share of goodwill is either paid or transferred to the remaining partners.
3. Revaluation of Assets and Liabilities: All assets and liabilities are revalued to reflect their current fair value. The profit or loss from revaluation is transferred to the partners’ capital accounts.
4. Adjustment of Current Account: If there is a current account balance, it is settled at the time of retirement.
5. Payment of Retirement Amount: After the adjustments, the amount owed to the retiring partner is paid. This could be in cash or by issuing a promissory note.
Step 3: Conclusion.
The retiring partner’s share must be fairly settled through revaluation of assets, adjustment of goodwill, and settlement of the capital account.