Settlement of claim of the retiring partner :

The retiring partner is entitled for the amount due to him from the firm. The amount due to the retiring partner is ascertained by preparing his capital account incorporating all the adjustments like the share of goodwill, undistributed profits or losses, accumulated reserves, profit or loss on revaluation of assets and liabilities etc.

The amount due is either paid off immediately or is paid in instalments. When it is not paid immediately, it will be transferred to his loan account.

a) When the amount due is paid off immediately

Retiring partner’s capital A/c                                                 Dr                            ….
To Bank A/c                                                                                                ….

b) When the amount due is not paid immediately

Retiring partner’s capital A/c                                              Dr                                               ….
To Retiring Partner’s Loan A/c                                                             ….

 

c) When the amount is paid partly at once and the balance in instalments

Retiring partner’s capital A/c                                                                Dr                               …..
To Bank A/c                                                                                                                         …..
To Retiring Partners loan A/c                                                                                        …..

Illustration :

A, B and C are partners sharing profits and losses in the ratio of 5:3:2 respectively. A retires from the firm on 1st April 2005. After his
retirement, his capital account shows a credit balance of Rs.1,35,000 after the necessary adjustments made. Give journal entries, if

a) the amount due is paid off immediately.

b) when the amount due is not paid immediately.

c) Rs. 45,000 is paid and the balance in future.

Solution:

Journal Entries

Date	Particulars	L.F.	Debit Rs.	Credit Rs.
	(a)
	C’s capital A/c                         Dr		1,35,000
	To Bank A/c			1,3500 0
	(The amount due Rs.1,35,000 is paid to C)
	(b)
	C’s capital A/c                         Dr		1,35,000
	To C’s Loan A/c			1,35,000
	(The amount due to C is transferrer to C’s loan account)
	(c)
	C’s Capital A/c                        Dr		1,35,000
	To Bank A/c			45,000
	To C’s Loan A/c			90,000
	(Rs.45,000 is paid and the balance transferred to C’s loan A/c)