Withdrawal of Partner
By agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership. The book value of a partner's interest is shown by the credit balance of the partner's capital account.
The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed.
If a retiring partner withdraws cash or other assets equal to the credit balance of his capital account, the transaction will have no effect on the capital of the remaining partners.
To illustrate, assume that several years after the formation of "A,B, & C" partnership Partner C decided to retire. The partners agreed to the withdrawal of cash equal to the amount of Partner C's equity in the assets of the partnership. Assume that the partners' capital accounts had credit balances as follows:
- Partner A $60,000
- Partner B $40,000
- Partner C $30,000
If Partner C withdraws $30,000 in cash, the entry on the books is as follows:
| Debit | Credit | |
|---|---|---|
| Partner C, Capital | 30,000 | |
| Cash | 30,000 |
If a retiring partner agrees to withdraw less than the amount in his capital account, the transaction will increase the capital accounts of the remaining partners.
For example, if Partner C withdraws only $20,000 in settlement of the interest, the difference between Partner C's equity in the assets of the partnership and the amount of cash withdrawn is $10,000 ($30,000 - $20,000).
This difference is divided between the remaining partners on the basis stated in the partnership agreement.
Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts. On this basis, Partner A's capital account is credited for $6,000 and Partner B's is credited for $4,000.
The entry in the books of the partnership is as follows:
| Debit | Credit | |
|---|---|---|
| Partner C, Capital | 30,000 | |
| Cash | 20,000 | |
| Partner A, Capital | 6,000 | |
| Partner B, Capital | 4,000 |
If a retiring partner withdraws more than the amount in his capital account, the transaction will decrease the capital accounts of the remaining partners. The excess of the amount withdrawn over retiring partner's equity in the partnership is divided between the remaining partners on the basis stated in the partnership agreement.
Read more about this topic: Partnership Accounting
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