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Retiring Partners From Business Partnerships

When a partner retires certain actions must be taken in order to ensure he/ she receives the amount due. This article will outline the accounting adjustments necessary to provide the exiting partner with their share of capital and goodwill.

The four necessary adjustments

Example of an exiting partner

Balance sheet
Partners' accounts

The accounting adjustments

Goodwill is £100,000 meaning each equal partner should temporarily receive £25,000 into their capital account. Goodwill is credited to each partner capital account. Goodwill is not capitalised, therefore it will not be recorded on the balance sheet.

As John is leaving the partnership his current account balance is combined with his capital account. Due to John having a positive balance of £39,224 in his current account, his current account is debited and his capital account is credited the same amount.

The partnership decided to pay John in full. In order to remove him from the books, his capital account must be debited £223,224 to bring it down to zero and the bank must be credited the same amount in order to give John what he is owed.

partner capital accounts

The existing partnership

After leaving, the three remaining partners decide to retain an equal sharing ratio. This results in each partner receiving one third of the business profits instead of one quarter. This is why when goodwill is removed from the capital accounts it is divided equally between Marie, Paul and Veronica.

The total partner account balance on the balance sheet will now read as being £755,399. This is a reduction of £223,224. Since the same amount was removed from the bank in order to pay the leaving partner, the bank balance will read £284,776. Both the debit and credit side of the balance sheet have been reduced by the same amount, therefore the balance sheet balances!

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