# Accounting: Retirement and Death of a Partner: Death of a Partner

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Treatment of retiring partner or death of a partner is almost same. In the case of death of a partner the claims will be paid to his legal heir/representative.

The representatives are entitled to the followings:

(a) The amount standing to the credit to the capital account of the deceased partner

(b) Interest on capital, if provided in the partnership deed up to the date of death

(c) Share of goodwill of the firm

(d) Share of undistributed profit or reserves

(e) Share of profit on the revaluation of assets and liabilities

(f) Share of profit up to the date of death

(g) Share of Joint Life Policy

The following amounts are debited to the account of the deceased partner’s legal representatives:

(i) Drawings

(ii) Interest on drawings

(iii) Share of loss on the revaluation of assets and liabilities;

(iv) Share of loss that has occurred till the date of his/her death.

## Calculation of Profit up to the Date of Death of a Partner

If the death of a partner occurs during the year, the representatives of the deceased partner are entitled to his/her share of profits earned till the date of his/her death. Such profit is ascertained by any of the following methods:

### Time Basis

In this case, it is assumed that profit has been earned uniformly throughout the year.

For example: The total profit of previous year is Rs. 1,25,000 and a partner dies three months after the close of previous year, the profit of three months is Rs. 31,250 i.e. 1,25,000 × 3/12, if the deceased partner took 2/10 share of profit, his/her share of profit till the date of death is Rs. 6,250 (i.e. Rs. 31,250 × 2/10)

### Turnover or Sales Basis

In this method, we have to take into consideration the profit and the total sales of the last year. Thereafter the profit up to the date of death is estimated on the basis of the sale of the last year. Profit is assumed to be earned uniformly at the same rate.

The above adjustments are made in the capital account of the deceased partner and then the balance in the capital account is transferred to an account opened in the name of his/her executor.

The payment to the representative depends on agreement. In the absence of an agreement, the legal representative of a deceased partner is entitled to interest @ 6% p.a. on the amount due from the date of death till the date of final payment.

Example:

Nutan, Sumit and Shiba are partners in a firm sharing profits in the ratio 5: 3: 2. On 31st December 2006 their Balance Sheet was as under

 Liabilities Amount (Rs.) Assets Amount (Rs.) Sundry CreditorsReserve FundCapital:Nutan 60,000Sumit 45,000Shiba 30,000 52,00015,0001,35,000 BankSundry DebtorsStockPlantBuildingCash 300002500027000500006000010000 2,02,000 2,02,00

Nutan died on 1 July 2007. It was agreed between her executor and the remaining partners that:

(i) Goodwill to be valued at 2½ years purchase of the average profits of the last Four years, which were: 2003 Rs. 25,000; 2004 Rs.20,000; 2005 Rs.40,000 and 2006 Rs.35,000.

(ii) Building is valued at Rs.70,000; Plant at Rs.46,000 and Stock at Rs.32,000.

(iii) Profit for the year 2006 is taken as having accrued at the same rate as that of the previous year.

(iv) Interest on capital is provided at 9% p.a.

(v) On 1 July 2007 her drawings account showed a balance of Rs.20,000.

(vi) Rs.25,950 are to be paid immediately to her executor and the balance is transferred to her Executors Loan Account.

Prepare Nutan’s Capital Account and Nutan’s Executor’s Account as on 1st July 2007.

Solution:

1. Valuation of Goodwill:

Total Profit = Rs.25,000 + Rs.20,000 + Rs.40,000 + Rs.35,000 = Rs. 1,20,000

Average Profit = 1,20,000/4 = Rs.30,000

Goodwill at 2½ year’s purchase = Rs.30,000 × 2½ = Rs.75,000

Nutan’s share of goodwill = 75,000 × 5/10 = Rs.37,500

It is adjusted into the Capital Accounts of Sumit and Shiba in the gaining ratio of 3: 2 i.e. Rs 22,500 and Rs 15000 respectively.

1. Share of Profit payable to Nutan = Rs.35,000 × 6/12 × 5/10 = Rs.8,750 (up to date of death)

2. Nutan’s Share of Reserve Fund = Rs.15,000 × 5/10 = Rs.7,500

3. Interest on Nutan’s Capital = 60,000 × 9/100 × 6/12 = Rs.2,700

Revaluation Account

Dr. Cr.

 Particulars Amount (Rs.) Particulars Amount (Rs.) PlantProfit transferred toNutan’s Capital 5,500Sumit’s Capital 3,300Shiba’s Capital 2,200 4,00011,000 StockBuilding 5,00010,000 15,000 15,000

Nutan’s Capital Account

Dr. Cr.

 Particulars Amount (Rs.) Particulars Amount (Rs.) DrawingsNutan’s Executor’s 20,0001,01,950 Balance b/dReserve FundSumit’s Capital (Goodwill)Shiba’s Capital (Goodwill)Profit & Loss (Suspense)Revaluation A/cInterest on Capital 6000075001500022500875055002700 1,21,950 1,21,950

Nutan’s Executor’s Account

Dr. Cr.

 Particulars Amount (Rs.) Particulars Amount (Rs.) BankNutan’s Executor’s Loan Transfer 25,95076,000 Nutan’s Capital 1,01,950 1,01,950 1,01,950

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