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Accountancy > Retirement or Death of a Partner > Adjustment of Partners Capital and Death of a Partner
Retirement or Death of a Partner

Adjustment of Partners Capital and Death of a Partner

On the death of a partner, the partnership ceases to exist. But the firm may not cease to exist as the other remaining partners may decide to continue the business. In case of death of a partner, the treatment of various items is similar to that at the time of retirement of the partner. After making all the adjustments in the Partners Capital Account, the amount that is due to him is paid to his Legal Representative.

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Adjustment of Partners Capital and Death of a Partner

At the time of the death of a partner, we credit the following amounts in the Deceased Partner’s Capital Account:

(i). Reserves or Undistributed profits

(ii). Goodwill

(iii). Profit on Revaluation of assets and liabilities.

(iv). Any loan is given by the partner

(v). The share of Joint Life Policy

(v). Share in subsequent Profits

(vi). Interest on Capital

However, we need to debit the following amounts:

(i). Drawings by the deceased partner

(ii). Interest on Drawings

(iii). Loss of Revaluation of assets and liabilities.

(iv). Share in subsequent Losses.

The legal representative of a deceased partner has a right to subsequent profits. He also has a right to choose whether he wants the share in the profit or the interest at the rate of 6 percent per annum.

There are the following two ways to ascertain the subsequent profit. It is the profit from the date of the last Balance Sheet until the date of death of the partner.

Browse more Topics under Retirement Or Death Of A Partner

Methods to calculate the profit of a deceased partner

Time Basis

Under this method, we assume that the profits are earned evenly throughout the year. We estimate the profit on the basis of the profit of the last year.

Partners Capital

Turnover or Sales Basis

Under this method, we consider the profit as well as the total sales of the last year. Hence, we estimate the profit up to the date of death of the partner on the basis of the sales of the last year.

After all these adjustments,  the amount standing in the Deceased Partner’s Capital A/c is payable to his/her legal representative.

Learn more about Accounting Treatment of Goodwill here in detail.

The Journal Entries are:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. General Reserve A/c Dr.
To Deceased Partner’s Capital A/c
(Being transfer of the share of reserve and undistributed profit to deceased partner’s capital)
2. Revaluation A/c Dr.
To Deceased Partner’s Capital A/c
(Being transfer of the share of revaluation profit to deceased partner’s capital)
3. Deceased Partner’s Capital A/c Dr.
To Revaluation A/c
(Being transfer of the share of revaluation loss to deceased partner’s capital)
4. Profit and Loss Suspense A/c Dr.
To Deceased Partner’s Capital A/c
(Being transfer of the share of subsequent profits to deceased partner’s capital A/c)
5. Deceased Partner’s Capital A/c Dr.
To Profit and Loss Suspense A/c
(Being transfer of the share of subsequent losses to deceased partner’s capital A/c)
6. Deceased Partner’s Loan A/c Dr.
To Deceased Partner’s Capital A/c
(Being transfer of partner’s loan to deceased partner’s capital A/c)
7. Joint Life Policy A/c Dr.
To Deceased Partner’s Capital A/c
(Being transfer of the share of the joint life policy to deceased partner’s capital A/c)
8. Deceased Partner’s Capital A/c Dr.
To Deceased Partner’s Legal Representative’s A/c
(Being transfer of final amount payable to his legal representative’s A/c)
9. Deceased Partner’s Legal Representative’s A/c Dr.
To Bank A/c
(Being final payment to the Deceased Partner’s Legal Representative)

 

Solved Example For You

Tina, Govind, and Kamini are partners sharing profits in the ratio of 3:2:1. Kamini dies on 1.07.2018. The Balance Sheet and other information are as under:

Balance Sheet as at 31.03.2018

Liabilities Amount Assets Amount
Partner’s Capital: Fixed Assets 130000
Tina 120000 Debtors 70000
Govind 80000 Stock 60000
Kamini 40000 Bank 50000
Reserve Fund 60000 Cash 40000
Creditors 50000
350000 350000

Tina and Govind agree to share future profits and losses equally. The value of Goodwill is ₹30000. The Goodwill is not to appear in books. The revaluation profit is ₹15000. The Joint Life Policy realizes ₹60000. The legal representative of Kamini opts for the share in subsequent profits. Kamini’s share in subsequent profits is ₹10000. Pass necessary journal entries. Also, prepare Partners Capital A/c.

Ans:

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
1 July Govind’s Capital A/c Dr. 5000
To Kamini’s Capital A/c 5000
(Being Kavita’s share of  Goodwill adjusted in the gaining ratio)
I July Revaluation A/c Dr. 15000
To Tina’s Capital A/c 7500
To Govind’s Capital A/c 5000
To Kamini’s Capital A/c 2500
(Being revaluation profit distributed among all the partners in old ratio)
1 July Reserve fund A/c Dr. 60000
To Tina’s Capital A/c 30000
To Govind’s Capital A/c 20000
To Kamini’s Capital A/c 10000
(Being reserve fund distributed in old ratio among all the partners)
1 July Joint Life Policy A/c Dr. 60000
To Tina’s Capital A/c 30000
To Govind’s Capital A/c 20000
To Kamini’s Capital A/c 10000
(Being transfer of the share of Joint Life Policy to partner’s capital accounts)
1 July Bank A/c Dr. 60000
To Joint Life Policy A/c 60000
(Being receipt of Joint Life Policy amount)
1 July Profit and Loss Suspense A/c Dr. 10000
To Kamini’s Capital A/c 10000
(Being transfer of the share in subsequent profits)
1 July Kamini’s Capital A/c Dr.
To Kamini’s Legal Representative’s A/c
(Being transfer of final amount payable to legal representative’s A/c)
1 July Kamini’s Legal Representative’s A/c Dr.
To Bank A/c
(Being final payment to Kamini’s Legal Representative)

 

Partner’s Capital A/c

Particulars Tina Govind Kamini Particulars Tina Govind Kamini
To Kamini’s Capital A/c 5000 By Balance b/d 120000 80000 40000
To Kamini’s Legal Representative’s A/c 77500 By Govind’s Capital A/c 5000
To Balance c/d 187500 120000 By Revaluation A/c 7500 5000 2500
By Reserve Fund A/c 30000 20000 10000
By Joint Life Policy A/c 30000 20000 10000
      By Profit & Loss Suspense A/c 10000
     
187500 125000 77500 187500 125000 77500

Working notes:

Calculation of Gaining ratio:

Particulars Tina Govind Kamini
a. New Ratio 1/2 1/2
b. Old Ratio 3/6 2/6 1/6
c. Gaining Ratio (a-b) Nil 1/6

 

Calculation of Goodwill to be adjusted:

30000 x 1/6 = 5000

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