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Death of a Partner – Accounting & Settlement

Introduction

Death is essentially same as Retirement, but with one major difference: Timing.

  • Retirement is usually planned for the end of the year (31st March).
  • Death can happen any day (e.g., 15th June).
  • Therefore, in Death cases, we must calculate the Share of Profit for the broken period (from last Balance Sheet date to Date of Death).

1. Accounting Steps

  1. Revaluation: Same as Retirement.
  2. Goodwill: Same (Gaining Ratio).
  3. Reserves: Same (Old Ratio).
  4. Profit till Death: The unique calculation.
  5. Settlement: Amount is transferred to Executor's Account (Since the partner is dead, we pay his legal heir/executor).

2. Calculating Profit till Death (P&L Suspense)

Since final accounts cannot be prepared mid-year, profit is estimated using two methods:

Method A: Time Basis (Average Profit)

Based on last year's profit or average profit.

Formula:

Profit = Last Year Profit × (Months worked / 12) × Deceased Partner's Share

Example:

  • Profit of 2022: ₹1,20,000.
  • B dies on 30th June 2023 (3 months worked).
  • B's Share: 1/3.
  • Profit Due: 1,20,000 × (3/12) × (1/3) = ₹10,000.

Method B: Turnover Basis (Sales Basis)

Based on sales achieved till death.

Formula:

Profit = (Profit of Last Year / Sales of Last Year) × Sales till Death × Share

3. Journal Entry for Interim Profit

The profit calculated above is recorded using a special account called Profit & Loss Suspense Account.

  1. If Ratio does not change:

    P&L Suspense A/c ...Dr                 (Amount)
    To Deceased Partner's Capital A/c      (Amount)

  2. If Ratio changes:

    Gaining Partners' Capital A/c ...Dr    (Amount)
    To Deceased Partner's Capital A/c      (Amount)

4. Executor's Account

The final balance is not paid to "Partner" but to "Executor".

Deceased Partner's Capital A/c ...Dr (Amount Due) To Deceased Partner's Executor A/c (Amount Due)

If the Executor is paid in installments, interest @ 6% p.a. is applicable on the outstanding balance.

Exam Notes: Writing the Answer

Question: "How is the share of profit calculated for a deceased partner?" (5 Marks)

Model Answer:

Since death occurs during the accounting year, the profit for the intervening period (from opening date to date of death) is estimated using:

  1. Time Basis: Assuming profit accrues evenly throughout the year, based on previous year's profit.
  2. Turnover Basis: Assuming profit margin % remains constant on sales.

Entry: The estimated profit is credited to the Deceased Partner via Profit & Loss Suspense Account so that the final P&L of the firm is not disturbed.

Summary

  • Timing: Death creates a "Broken Period".
  • P&L Suspense: Account used to give interim profit.
  • Executor: The legal representative of the deceased.
  • Joint Life Policy (JLP): If the firm has a JLP, the claim amount (Surrender or Maturity) is also shared.

Quiz Time! 🎯

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