Modes of Disposal of Amount Due to a Retiring Partner
Disposal of amount due to retiring partner is a crucial topic in partnership accounts, commonly asked in school board exams, UGC NET, CA Foundation, and other commerce competitive tests. Understanding how to settle a retiring partner’s claim—through immediate payment or in installments—is essential for both practical business knowledge and exam success.
| Mode of Disposal | Description | Payment Example | Accounting Treatment |
|---|---|---|---|
| Immediate Lump Sum | Partner receives the entire due amount instantly on retirement. | ₹2,00,000 paid in cash at exit | Capital A/c debited, Cash A/c credited |
| Transfer to Loan Account (Installments) | Amount transferred to a loan account, repaid over time (with/without interest). | ₹2,00,000 paid as ₹50,000 every 6 months with 6% interest | Capital A/c debited, Partner’s Loan A/c credited |
Disposal of Amount Due to Retiring Partner
The disposal of amount due to retiring partner refers to settling the total financial claim of a partner exiting the firm. This includes payment of their capital, share of profits/reserves, and goodwill. The process ensures fair accounting, legal compliance, and smooth partner transition in any partnership business.
Reasons for Disposal of Amount Due to Retiring Partner
Partners retire due to age, health, business changes, disagreements, or personal choice. Disposal of dues ensures:
- Equitable settlement based on the partnership agreement
- Legal compliance and reduction of future disputes
- Smooth succession or reconstitution of the firm
- Retiring partner gets fair value for their share in assets and profits
Modes of Settlement of Amount Due to Retiring Partner
There are two primary modes of disposal of amount due to a retiring partner, commonly asked in exams:
- Immediate Lump Sum Payment: The firm pays the entire due in full at the time of retirement.
- Transfer to Loan Account (Installment Payment): If full payment is not feasible, the balance is transferred to the Retiring Partner's Loan Account, repaid in agreed installments (with or without interest).
For example, if ₹1,00,000 is due but the firm pays only ₹40,000 now, the balance ₹60,000 becomes a partner's loan, repayable with agreed interest.
Accounting Treatment and Journal Entries
Disposal of a retiring partner’s claim includes key steps:
- Calculate total amount due after all adjustments (capital, profits, goodwill, etc.).
- If paid fully: Debit Retiring Partner’s Capital Account, Credit Cash/Bank Account.
- If not paid fully: Debit Retiring Partner’s Capital Account, Credit Cash/Bank for paid portion, and Credit Retiring Partner’s Loan Account for balance.
- If interest is agreed on loan balance, record annual interest entries.
Example Journal Entries
1. Full Payment in Cash:
Retiring Partner’s Capital A/c Dr. (Total due)
To Cash/Bank A/c (Same amount)
2. Partial Cash and Balance as Loan:
Retiring Partner’s Capital A/c Dr. (Total due)
To Cash/Bank A/c (Paid)
To Retiring Partner’s Loan A/c (Balance due)
3. Interest on Loan:
Interest A/c Dr.
To Retiring Partner’s Loan A/c
Goodwill and Other Adjustments during Disposal
When a partner retires, their share of goodwill, undistributed profits or reserves, and revaluation profits/losses must be credited or debited to their account. Goodwill is adjusted among continuing partners (usually in gaining ratio), ensuring the retiring partner receives a fair share. See detailed explanation at Goodwill Treatment in Partnership Accounts.
Legal Provisions: Section 37 of Indian Partnership Act
If the amount due is not paid immediately on retirement, Section 37 entitles the outgoing partner to claim simple interest (usually at 6% per annum) on the unpaid sum or a proportionate share of profits earned with that amount until payment is made. This ensures legal protection for retiring partners.
Common Student Doubts and Mistakes
- Confusion between settlement of retiring vs deceased partner’s account (see Death of a Partner for comparison).
- Missing loan account or interest entries if payment is not immediate.
- Wrong goodwill adjustment—always use gaining ratio among remaining partners.
- Not applying Section 37 if amount remains unpaid for longer periods.
For solved examples, refer to TS Grewal Solutions Class 12 Accountancy and DK Goel Solutions for Class 12.
Summary
In summary, disposal of amount due to retiring partner is the process of settling all claims of a retiring partner—either by immediate payment or as a loan. Careful adjustment of capital, profits, and goodwill, and section-wise legal compliance, ensures smooth business succession. Practice from Vedantu’s solved questions for confidence in board and competitive exams.
FAQs on Disposal of Amount Due to Retiring Partner in Partnership Accounts
1. How is the amount due to a retiring partner settled?
Settlement of a retiring partner's dues involves calculating their share of capital, accumulated profits, reserves, and goodwill. This amount is then paid either as a lump sum or in installments, as per the partnership deed or legal requirements under the Indian Partnership Act, specifically Section 37.
2. What is the method of payment due to a retiring partner?
The payment to a retiring partner can be made in two main ways: a lump sum payment or through installments. A lump sum settles the entire amount immediately, while installments spread the payment over a period with or without interest as per the agreement. Section 37 of the Indian Partnership Act governs the payment procedure, including the treatment of delayed payments.
3. What happens when a partner retires?
When a partner retires, their share of the partnership assets and liabilities must be settled. This involves calculating their share of capital, profits, reserves, and goodwill. The amount due is then paid to the retiring partner, either in a lump sum or through installments, based on the partnership agreement and the Indian Partnership Act. Legal implications, particularly concerning delayed payments, arise if the settlement is not done according to agreement.
4. What is the accounting treatment of a retiring partner?
The accounting treatment for a retiring partner involves several steps: calculating the amount due, adjusting goodwill, transferring the balance to a loan account (if paid in installments), and recording relevant journal entries. Section 37 of the Indian Partnership Act provides guidance on legal compliance. Accurate recording is crucial for maintaining accurate partnership accounts.
5. What are the two modes of disposal of amount due to a retiring partner?
There are two primary modes of disposal: lump sum payment and payment by installments. A lump sum payment settles the entire amount due immediately, while installments involve transferring the amount to a loan account and making payments over an agreed period, possibly with interest. The choice depends on the partnership agreement and financial capacity.
6. How is the amount due to a retiring partner calculated?
The amount due to a retiring partner is calculated by considering their share of the partnership's capital, accumulated profits, reserves, and any goodwill. Any liabilities or losses are deducted. This calculation should adhere to the partnership deed and legal provisions. The method is crucial for equitable distribution of assets and liabilities upon retirement.
7. What journal entry is passed if the amount is paid fully in cash?
If the amount due is paid fully in cash, the journal entry would debit the Retiring Partner's Capital Account (for the total amount due) and credit the Cash/Bank Account (for the amount paid). This entry reflects the settlement of the retiring partner's financial claims with the firm.
8. What is Section 37 of the Indian Partnership Act related to retirement?
Section 37 of the Indian Partnership Act deals with the rights of a retiring partner. It outlines the procedure for settling their accounts, including the provision of interest at 6% per annum on any delayed payments or their share of profits earned during this period until their full dues are settled. This section protects the interests of the outgoing partner.
9. How is goodwill treated during retirement?
Goodwill is an intangible asset representing the reputation and customer loyalty of the partnership. When a partner retires, their share of the goodwill is valued and added to their amount due. The remaining partners typically absorb this amount, affecting their capital accounts.
10. What if the amount due to a retiring partner is not paid immediately?
If payment to a retiring partner is delayed, they are entitled to interest on the outstanding amount, typically at 6% per annum, as per Section 37 of the Indian Partnership Act. In addition to the interest, the partner may also be entitled to a share of the partnership's subsequent profits. This ensures fair compensation for delayed payments.
11. Are there any income tax implications on the amount received by the retiring partner?
Yes, the amount received by a retiring partner may have income tax implications. The tax liability depends on whether the amount represents a return of capital or income from profits, and the relevant tax laws applicable at the time of retirement. Professional tax advice is recommended.
12. Can the settlement terms differ if no partnership deed exists?
If no partnership deed exists, the Indian Partnership Act, 1932 governs the settlement terms. The Act sets default rules for profit-sharing, capital adjustments, and other aspects of partnership dissolution or a partner's retirement. The Act provides a legal framework for the process if no prior agreement is in place.
13. What if the retiring partner disputes the amount calculated?
Disputes regarding the amount due to a retiring partner can be resolved through various methods. These include negotiation between the parties, arbitration (if provided for in the partnership deed), or legal action, depending on the complexity of the issues and value of the disagreement. Professional legal counsel may be necessary.
