Retirement of a partner

When a partner retires from the partnership, their interest in the partnership must be settled. This involves determining the value of their share of the partnership.
They may withdraw from their Capital Account, or if that’s not enough, from the remaining partners’ current accounts in the agreed ratio.
If a partner’s share of capital is more than what they withdraw, the surplus is distributed among the remaining partners in the agreed ratio.

Adjustment of Partnership Capital

When a partner retires, their capital is normally withdrawn and the total capital of the partnership decreases. If required, the remaining partners can adjust their capital so that the total remains constant.
The remaining partners can contribute additional capital, or withdraw some in case of surplus, to adjust their capital to the new ratio.

After the retirement of a partner, the partnership is reconstituted. This means that a new agreement is made between the remaining partners.
A new profit-sharing ratio is agreed upon, which could be the existing ratio among the remaining partners, or could be re-negotiated.
A partner’s retirement may also trigger revaluation of partnership assets and liabilities. The difference between original and revalued figures is adjusted in the remaining partners’ capital accounts in the old profit sharing ratio.

When a partner retires, all third parties like customers, suppliers, and banks should be notified so they are aware of the change in the business’s position and responsibility.
It is important for a retiring partner to ensure they are no longer held liable for any partnership debts incurred after their retirement. This should be clarified with third parties and should be part of the retirement agreement.

Goodwill is the reputation of a business and its potential to earn profits in the future.
When a partner retires, the partnership should calculate and account for goodwill, unless stated otherwise in the agreement.
Goodwill is distributed to all partners, including the retiring partner, according to their old profit sharing ratios. The value of goodwill is credited to the retiring partner’s capital account, increasing their final payout.
If a revaluation of goodwill is required, it should be done just before the partner’s retirement.