When a partner retires or passes away, their claim against the business must be calculated, and a clear settlement process should follow. This involves outlining the retiring partner’s loan account if applicable and detailing the executor’s account for a deceased partner. Adjustments to the balance sheet of the reconstituted enterprise are also required.

The total amount due to a retiring partner, or to the legal representatives/executors in the case of death, includes:

• Credit balance of the partner’s capital account
• Credit balance of the current account (if any)
• Share of goodwill
• Share of accrued profits or reserves
• Share in the profit from the revaluation of assets and liabilities
• Gains accrued up to the retirement/death date
• Interest on the capital (only if applicable) up to retirement/death
• Any commission or salary due up to the retirement/death date

However, certain deductions apply to the partner’s share, including:

• Debit balance on the current account (if any)
• Share of goodwill to be written off if needed
• Accrued losses
• Share of loss from the revaluation of assets and liabilities
• Losses up to the date of retirement/death
• Drawings made until the retirement/death date
• Interest on drawings (if applicable) up to retirement/death

In the case of either retirement or death, the following accounting factors need to be considered:

1. Determination of New Profit Sharing Ratio (NPSR) and Gaining Ratio: Recalculate the profit-sharing ratio for the remaining partners.

2. Goodwill Treatment: Allocate goodwill among the remaining partners based on the adjusted ratios.

3. Revaluation of Assets and Liabilities: Assess and adjust the value of assets and liabilities.

4. Adjustment for Unrecorded Assets and Liabilities: Make necessary adjustments to account for previously unrecorded items.

5. Allocation of Accrued Gains and Losses: Distribute any accumulated gains or losses among the partners.

6. Determination of Profit or Loss up to Death/Retirement Date: Calculate the share of profits or losses up to the final date.

7. Capital Adjustments: Adjust the capital as needed for smooth settlement.

8. Settlement with Deceased/Retired Partner: Determine the final amount due and make payments to the deceased partner’s executors or the retiring partner.

This comprehensive guide explains how to ascertain the amount due to a retiring or deceased partner, a key topic for Class 12 Commerce students. For more information and detailed tutorials, stay connected with Eduacademy.