Partnership accounts

Partner Retiring

Overview

When a partner retires, the same adjustments apply as when a new partner joins:

1. Revalue assets (if agreed) — in the old ratio including the retiring partner
2. Adjust for goodwill — goodwill in the old ratio (all three partners); goodwill out in the new ratio (remaining partners only)

The retiring partner's total entitlement = closing capital account balance (after adjustments).

Settlement Options

The amount owed to the retiring partner can be settled in one or more ways:

Worked Example — Ronnie, Jimmy and Alex

Old ratio 3:2:1. Jimmy retires; Ronnie and Alex continue equally. Goodwill = £36,000. Net asset revaluation gain = £30,000. Jimmy's amount transferred to loan account.

Goodwill:

• In (old ratio 3:2:1): Ronnie +£18,000; Jimmy +£12,000; Alex +£6,000
• Out (new ratio 1:1): Ronnie −£18,000; Alex −£18,000

Net goodwill effect on remaining partners: Alex pays £12,000 (net) to Jimmy via the capital account adjustment.

Jimmy's capital account:

Jimmy is owed £62,000 (£40,000 + £10,000 + £12,000), transferred to a loan account.

Statement of Financial Position after retirement:

• Jimmy's £62,000 appears as a non-current liability (loan account)
• Remaining partners' capital accounts show their updated balances
• All assets at revalued amounts
• Bank unchanged (no cash paid to Jimmy in this example)

Key Rules

• Revaluation and goodwill are always done in the old ratio (including the retiring partner)
• Goodwill is written out in the new ratio (remaining partners only)
• The retiring partner's goodwill share is always credited to their capital account (they gain from it)
• The remaining partners who absorb the retiring partner's goodwill share bear the cost