Purchasing of Partner's Interest
When a partner retires from the business, the partner's interest may be purchased directly by one or more of the remaining partners or by an outside party. If the retiring partner's interest is sold to one of the remaining partners, the retiring partner's equity is merely transferred to the other partner.
For example, assume that Partner C's equity is sold to Partner B. The entry for the transaction on the books of the partnership is as follows:
| Debit | Credit | |
|---|---|---|
| Partner C, Capital | 30,000 | |
| Partner B, Capital | 30,000 |
The amount paid to Partner C by Partner B is a personal transaction and has no effect on the above entry. Any gain or loss resulting from the transaction is a personal gain or loss of the withdrawing partner and not of the business.
If the retiring partner's interest is purchased by an outside party, the retiring partner's equity is transferred to the capital account of the new partner, Partner D.
| Debit | Credit | |
|---|---|---|
| Partner C, Capital | 30,000 | |
| Partner D, Capital | 30,000 |
The amount paid to Partner C by Partner D is also a personal transaction and has no effect on the above entry.
Read more about this topic: Partnership Accounting
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