Three cases regarding adjustment of capital accounts

(a) When total capital of the new firm is given.

Following steps are to be taken in this case:

1. Calculate the proportionate capital of each of the remaining partners by multiplying the total capital of new firm with the share of the remaining partners.

2. Calculate actual capitals of partners after all adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

3. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

4. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

(b) When total capital of the new firm is not given:

Following steps are to be taken in this case:

1. Calculate total capital of new firm by taking the actual combined capitals of all the partners (including retiring partner) after all the adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

2. Calculate the proportionate capital of each of the remaining partners by multiplying the total capital of new firm with the share of the remaining partners.

3. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

4. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

(c) When retiring partner is to be paid through cash brought in by the continuing partners in such a way as to make their capitals proportionate to the new profit sharing ratio:

Following steps are to be taken in this case:

1. Calculate actual capitals of remaining partners after all adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

2.  Add to above combined capitals, the capital of retiring partner after all adjustments mentioned above.

3. From this amount, deduct the bank/cash balance appearing in the Balance Sheet of the firm.

4. Add the minimum cash/bank balance required and calculate the total capital of the new firm.

5. Calculate the proportionate capital of the remaining partners separately by multiplying the total capital with their new share.

6. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

7. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

Capital Accounts of Partners on Retirement

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