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What happens to the capital accounts when a partner retires?

Practice Questions

Q1
What happens to the capital accounts when a partner retires?
  1. They are closed
  2. They are transferred to the new partner
  3. They are adjusted for goodwill
  4. They remain unchanged

Questions & Step-by-Step Solutions

What happens to the capital accounts when a partner retires?
  • Step 1: Understand that a partner's capital account shows their share of the partnership's assets.
  • Step 2: When a partner retires, their share of the partnership needs to be settled.
  • Step 3: Calculate the goodwill of the partnership, which is the extra value beyond the physical assets.
  • Step 4: Adjust the retiring partner's capital account to include their share of the goodwill.
  • Step 5: Distribute the adjusted capital account balance to the retiring partner.
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