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.

Suggested Videos

 

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

• Adjustment for Revaluation of Assets and Liabilities
• New Profit Sharing and Gaining Ratio
• Treatment of Goodwill

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.

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