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Death of Partner Notes

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Mahima
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67 views

Death of Partner Notes

Uploaded by

Mahima
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Death of Partner

MEANING
Partnership comes to an end on the death of a partner but the
firm may continue its business with the remaining partners who
take share of the deceased partner in their old-profit sharing ratio
or in the ratio as decided by them.
The accounting process on the death of a partner is same as
that of retirement of a partner.
Adjustments required to be made at the time of death of a partner
are :
1. Change in the Profit-sharing Ratio;
2. Adjustment for Goodwill;
3. Adjustment for Revaluation of Assets and Reassessment of
Liabilities;
4. Adjustment for existing balances of Reserves, Accumulated
(Undistributed) Profits and Losses;
5. Determining the amount due to the deceased partner;
6. Payment to the Deceased Partner’s Legal Heir or Executors of his
estate; and
7. Adjustment of Capitals of Continuing Partners (if agreed).
1. Change in the Profit-sharing Ratio
New Profit Share of Continuing Partner = Old Profit Share +
Profit Share Taken (Acquired from death partner )
Gain of a Partner = New Share – Old Share

2. VALUATION AND ADJUSTMENT OF GOOD WILL


Deceased Partner is entitled to his share of Goodwill at the time of
death because Goodwill was earned by the firm at the time when he
was a partner. Continuing/gaining partners compensate the deceased
partner by paying goodwill in their gaining ratio.

Deceased Partner’s Share of Goodwill = Value of Firm’s Good will x Profit


Share of deceased Partner.
1. WHEN GOODWILL EXISTS IN THE BOOKS
Case 1:
Goodwill existing in the books of account is written off by debiting all
Partners’ Capital Accounts including deceased partner in their old profit-
sharing ratio. The Journal entry passed is :
All Partners’ Capital A/c ..Dr
To Goodwill A/c
(Existing Goodwill written off)
2. WHEN GOODWILL DOES NOT EXIST IN THE BOOKS( Goodwill is valued
at the time of death)
Gaining Partners’ Capital A/c ..Dr.
To Deceased Partners’ Capital A/c
(Adjustment made for Goodwill to deceased partner )

Step1 Calculate Gaining ratio = New ratio – Old ratio


Step2 Calculate the deceased Partner share in Goodwill
Step 3 Journal entry
3. SHARE OF PROFIT OR LOSS IN THE YEAR OF DEATH
Deceased partner is entitled to his share in profit from the
beginning of the accounting year up to the date of his death. Similarly,
he bears loss, if any incurred by the firm during his period.
Journal entries passed are :
i. If profit-sharing ratio of the remaining or continuing partners does
not change :
When Deceased Partner’s Share is Profit :
Profit and Loss Suspense A/c……………..…Dr.
To Deceased Partner’s Capital A/c

The balance of Profit and Loss Suspense Account is shown in the


assets side of the balance sheet and is transferred to the debit side of
Profit and Loss Appropriation Account at the end of the year.
ii. If profit-sharing ratio of the remaining or continuing partners change
a) Profit and loss suspense A/c …..dr
To Deceased partner’s capital A/c

b ) Gaining partner’s capital A/c …. Dr


To Profit and loss suspense a/c

Alternatively, following Journal entry may be passed at the time of death of a


partner :
Gaining Partners’ Capital A/c…….……Dr.
To Deceased Partner’s Capital A/c

When Deceased Partner’s Share is Loss


Deceased Partner’s Capital A/c ……….…Dr.
To Profit and Loss Suspense A/c

Later, the balance of Profit and Loss Suspense Account is transferred to the
gaining partners in their gaining ratio.
1. Estimation of Profit on Time Basis
If time basis is used, the profit is assumed to has arisen uniformly over
the year. The deceased partner’s share of profit is calculated as is agreed
among all the partners. It may be calculated based on the previous year’s profit
alone or on the basis of average profit of certain years.
Step 1 Calculate average profit
Step 2 Find profit till date of death = Average profit Xnumber of months /12
Step 3 deceased partner’s share = Profit till date of death x share in Profits

2. Estimation of Profit on Turnover or Sales Basis


Profit or Loss of the deceased partner till the date of his death is to be
determined on the basis of sales or turnover, we should know
(a) Sales for the previous accounting year and
(b) Sales up to the date of death.
Step1 calculate profit % = (profit of last year X 100)/ Sales of last year
Step2 calculate profit till date of death = Sales up to date of death X profit %
Step 3 deceased partner’s share = Profit till date of death x share in Profits

Deceased partners capital A/c


Particular Amount Particular Amount
To Drawings By Balance B/d
To interest on drawings By Revaluation Gain
To revaluation loss By General Reserve
To Advertisement By Goodwill
suspense
To Goodwill ( written off ) By profit and loss suspense(
IOC )
To Executors A/c By profit and loss suspense
( balance transferred ) ( shares in profit till date
of death )
Methods of payment of amount due to the retiring partner:
i. Payment of Full Amount in Lump Sum:
Deceased Partner’s Executor’s A/c …Dr.
To Cash/Bank A/c

ii. Payment in Installments:


Following entries are to be passed:
Amount due is transferred to Retiring Partner’s Loan A/c
Retiring Partner’s Capital A/c …Dr.
To Retiring Partner’s Loan A/c
For interest provided:
Interest A/c …Dr.
Deceased Partner’s Executor’s A/c

For payment of installment:


Deceased Partner’s Executor’s Loan A/c …Dr.
To Bank A/c

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