Retirement of a partner is another form of reconstitution of the firm.. In this case, also, the old partnership agreement comes to an end and a new partnership agreement comes into effect.. A partner may retire from the firm due to any of the following reasons:
- If there is an agreement to this effect among the partners
- If no such agreement exists, then if all the partners agree to retirement of a partner,
- If the partnership is at will, then by giving a written notice to the remaining partners, of the decision to retire by the retiring partner
Adjustments required on the retirement of a partner
- Find the new profit sharing ratio and the gaining ratio.
- Revaluation of assets and Liabilities
- Distribution of reserves accumulated profits and accumulated losses amongst all the partners.
- Capital adjustment as per the terms of agreement.
- Valuation and accounting for goodwill.
- Find the amount due to the retiring partner and settlement of the same. In case the partner is retiring during the year, then he will also get the share in profits till the date of retirement.
Liabilities of a retiring partner
A retiring partner is liable for all the acts of the firm, up to the date of his retirement, unless there is an agreement contrary to this effect.
A retiring partner is also liable to 3rd parties for the acts of the firm, even after his retirement, until a public notice of his retirement is given.
In case the retiring partner has a debit balance in either his current account or capital account, then he is liable to pay the same to the firm.
Rights of a retiring partner
A retiring partner has the right to get his share of goodwill of the firm, to receive credit balance lying in his capital account, his share of profit till the date of his retirement, in case he is retiring during the year.