How to Withdrawal of a Partner

Withdrawal of a Partner

A partner generally withdraws from a partnership in one of two ways. (1) First, the withdrawing partner can sell his or her interest to another person who pays for it in cash or other assets. For this, we need only debit the withdrawing partner’s capital account and credit the new partner’s capital account. (2) The second case is when cash or other assets of the partnership are distributed to the withdrawing partner in settlement of his or her interest. To illustrate these cases, assume that Perez withdraws from the partnership of BOARDS in some future period. The partnership shows the following capital balances at the date of Perez’s withdrawal: K. Zayn, $84,000; H. Perez, $38,000; and T. Rasheed, $38,000. The partners (Zayn, Perez, and Rasheed) share income and loss equally. Accounting for Perez’s withdrawal depends on whether a bonus is paid. We describe three possibilities.

No Bonus If Perez withdraws and takes cash equal to Perez’s capital balance, the entry is




Perez can take any combination of assets to which the partners agree to settle Perez’s equity. Perez’s withdrawal creates a new partnership between the remaining partners. A new partnership contract and a new income-and-loss-sharing agreement are required.

Bonus to Remaining Partners
A withdrawing partner is sometimes willing to take less than the recorded value of his or her equity to get out of the partnership or because the recorded value is overstated. Whatever the reason, when this occurs, the withdrawing partner in effect gives the remaining partners a bonus equal to the equity left behind. The remaining partners share this unwithdrawn equity according to their income-and-loss-sharing ratio. To illustrate, if Perez withdraws and agrees to take $34,000 cash in settlement of Perez’s capital balance, the entry is





Perez withdrew $4,000 less than Perez’s recorded equity of $38,000. This $4,000 is divided between Zayn and Rasheed according to their income-and-loss-sharing ratio.


Bonus to Withdrawing Partner
A withdrawing partner may be able to receive more than his or her recorded equity for at least two reasons. First, the recorded equity may be understated. Second, the remaining partners may agree to remove this partner by giving assets of greater value than this partner’s recorded equity. In either case, the withdrawing partner receives a bonus. The remaining partners reduce their equity by the amount of this bonus according to their income-and-loss-sharing ratio. To illustrate, if Perez withdraws and receives $40,000 cash in settlement of Perez’s capital balance, the entry is





Falcon Cable Communications
set up a partnership withdrawal agreement. Falcon owns and operates cable television systems and had two managing general partners. The partnership agreement stated that either partner “can offer to sell to the other partner the offering partner’s entire partnership interest … for a negotiated price. If the partner receiving such an offer rejects it, the offering partner may elect to cause [the partnership] … to be liquidated and dissolved.”