Adjusting continuing partners' capitals

After a partner leaves, the continuing partners may agree to bring their capitals into line with their new ratio. First fix the total capital of the new firm. It may be:

• a fixed amount agreed by the partners;
• the total of their adjusted capitals (if nothing else is said);
• their adjusted capitals plus the amount payable to the retiring partner (when they must bring in the cash to pay him).

Then each partner's required capital = total capital × new share. Compare it with his adjusted capital:

• a shortfall is brought in as cash;
• an excess is withdrawn (or transferred to his current account).

Example: Asha's adjusted capital is 1,60,000 and Lata's 80,000, and they will share 3:1. Total 2,40,000; Asha needs 1,80,000 and Lata 60,000. So Asha brings in 20,000, and Lata withdraws 20,000.

If the firm does not have enough cash to pay the retiring partner, it may need a bank overdraft, or the partners must bring in more capital.