Retirement of an Existing Partner (Cambridge International A-Level Accounting)
Spec point — how to prepare partners’ capital and current accounts to record changes required in respect of goodwill and revaluation of assets on: – the retirement of an existing partner
Retirement of an existing partner
How do I update partners' capital accounts when an existing partner retires?
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STEP 1 Calculate the net profit or loss on revaluation for each of the existing partners using the old ratio
- Debit the capital accounts if it is a net loss
- Credit the capital accounts if it is a net profit
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STEP 2 Calculate the share of the raised goodwill for each of the existing partners (including the retiring partner) using the old ratio
- **Credit **the capital accounts
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STEP 3 Calculate the share of the** eliminated goodwill** for each of the current partners (excluding the retired partner) using the new ratio
- Debit the capital accounts
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STEP 4 Balance the capital accounts to calculate how much the retiring partner is owed
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Transfer the balance on the retiring partner's current account to their capital account
- Credit the capital account if the current account has a credit balance
- Debit the capital account if the current account has a debit balance
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Debit the capital account with the value of any assets that the retiring partner is taking with them
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Credit the capital account with the value of any outstanding loans made by the retiring partner
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How is the retiring partner's account settled?
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The partner is entitled to the balance on their capital account when they retire
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The remaining partners can pay the retiring partner immediately
- Debit the retiring partner's capital account
- Credit the bank account
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The retiring partner might agree to defer the payment and treat it like a loan
- Debit the retiring partner's capital account
- Credit a loan account with the retiring partner's name
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If the retiring partner defers the payment, then they might receive interest on the loan in the future
Exam Hint Paper 3 can test the retirement of an existing partner and admission of a new partner in the same question. You just need to combine the steps to answer these.
This table summarises who is involved at each step. Remember, the remaining partners will be affected by all the steps.
Step Partner that is retiring Partner that is joining Revaluation ✓ ✕ Raising the goodwill ✓ ✕ Eliminating the goodwill ✕ ✓ Balancing the accounts ✓ ✓
Worked Example Lawrence, Mike and Nikita were in partnership for many years sharing profits and losses in the ratio 3:3:2 respectively.
The partnership's statement of financial position at 31 December 2025 was as follows:
$ $ Assets Non-current assets 175 000 Current assets Inventory 28 000 Trade receivables 25 000 Bank 7 000 60 000 Total assets 235 000 Capital and liabilities Capital Capital account - Lawrence 80 000 - Mike 70 000 - Nikita 50 000 200 000 Current account - Lawrence 12 000 - Mike 8 000 - Nikita (14 000) 6 000 Current liabilities Trade payables 29 000 Total capital and liabilities 235 000 The partners have agreed the following to take effect on 1 January 2026 on the retirement of Nikita.
- Nikita will take a motor vehicle at the net book value of $3 000. The remaining non-current assets are to be valued at $191 500.
- Inventory with a cost price of $10 000 is to be written down to a net realisable value of $6 500.
- Goodwill is to be valued at $32 000 and will not remain in the books of account.
- Lawrence and Mike will continue in partnership, sharing profits and losses in the ratio 3:2 respectively.
- Nikita will transfer $15 000 to a loan account to be repaid in full in 2030. No loan interest will be charged on this amount.
- The remaining balance owed to Nikita will be paid from the business bank account.
Prepare the revaluation account and the partners' capital accounts to show the retirement of Nikita.
Answer:
Prepare the revaluation account
- Find the increase in the non-current assets
$191 500 - ($175 000 - $3 000) = $19 500
- Find the decrease in inventory
$10 000 - $6 500 = $3 500
- The balancing figure is the net profit or loss on revaluation
$19 500 - $3 500 = $16 000
- Split the amount using the old profit-sharing ratio
Lawrence:
3 / 8×$ 16 000=$ 6 000Mike:
3 / 8×$ 16 000=$ 6 000Nikita:
2 / 8×$ 16 000=$ 4 000
$ $ Decrease in inventory 3 500 Increase in non-current assets 19 500 Capital - Lawrence (Profit on revaluation) 6000 Capital - Mike (Profit on revaluation) 6 000 Capital - Nikita (Profit on revaluation) 4 000 19 500 19 500 Calculate the share of goodwill using the old ratio
- These will be credited to the capital accounts
Lawrence:
3 / 8×$ 32 000=$ 12 000Mike:
3 / 8×$ 32 000=$ 12 000Nikita:
2 / 8×$ 32 000=$ 8 000Calculate the share of goodwill using the new ratio
- These will be debited to the capital accounts
Lawrence:
3 / 5×$ 32 000=$ 19 200Mike:
2 / 5×$ 32 000=$ 12 800Prepare the capital accounts
- Debit each capital account with the share of the profit on revaluation
- Debit Nikita's capital account with the motor vehicle
- Debit Nikita's capital account with the current account balance
- Debit Nikita's capital account with the loan amount
- The balance figure for Nikita's account is the bank value
Capital Accounts
Lawrence
$Mike
$Nikita
$Lawrence
$Mike
$Nikita
$Goodwill 19 200 12 800 Balance b/d 80 000 70 000 50 000 Vehicle 3 000 Revaluation 6 000 6 000 4 000 Loan 15 000 Goodwill 12 000 12 000 8 000 Current account 14 000 Bank 30 000 Balance c/d 78 800 75 200 98 000 88 000 62 000 98 000 88 000 62 000 Balance b/d 78 800 75 200
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