In case of death of a partner, the amount that is due to him is paid to his Legal Representative. The treatment of various items is similar to that at the time of retirement of the partner. Usually, the legal representative is also paid the profits till the death of the partner unless there is an agreement to the contrary among the partners.
Amount Payable to Legal Representative
In case of death of a partner, his or her legal representative receives the amount payable to him or her by the firm. The legal representative of the deceased partner is eligible for the following amounts:
- The amount standing in the deceased partner’s Capital A/c.
- The amount of Interest on Capital up to the date of death, if partnership deed so provides.
- Deceased partner’s share of Goodwill of the firm.
- Deceased partner’s share in the reserves or the undistributed profits, if any.
- The deceased partner’s share of the Joint Life Policy amount received on his death.
- The share of the deceased partner in Profit on Revaluation of assets and liabilities.
- Deceased partner’s share of profit up to the date of his death.
Learn more about Joint Life Policy – Accounting Treatment here in detail.
However, the following amounts need to be deducted before the final payment is made to the legal representative of the deceased partner:
- Drawings by the deceased partner
- Interest on Drawings
- The share of the deceased partner in Loss on Revaluation of assets and liabilities.
- Deceased partner’s share of loss up to the date of his death.
Calculation of Profit up to the Date of Death of the Partner
When a partner dies during the year it becomes difficult to ascertain the profit up to the date of his death. Also, it is not possible to prepare Trading and Profit and Loss Account in the middle of the year.
Thus, for this purpose, the partners calculate the profit by preparing the Profit and Loss Suspense A/c. After determining the share of the deceased partner, they credit this amount to his Capital A/c.
The Journal Entry is:
|Date||Particulars||Amount (Dr.)||Amount (Cr.)|
|Profit and Loss Suspense A/c||Dr.||XXX|
|To Deceased Partner’s Capital A/c||Cr.||XXX|
|(Being the share of the deceased partner in the profits up to his death, credited to his Capital A/c)|
There are the following two ways to ascertain this profit:
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.
Solved Example For You
Calculate the deceased partner’s share of profit in the following cases assuming the books are closed on 31st March every year.
- Ayush, Arpita and Adam are partners sharing profits and losses in the ratio of 2:2:1. Adam dies on 1st July 2018. The total profit for the previous year is ₹150000.
- Amit, Saurabh, and Tej are partners sharing profits in the ratio of 3:2:1. Tej dies on 1st September 2018. Sales for the previous year are ₹600000 and the profit on sales is ₹90000. Sales up to 31st August 2018 are ₹360000.
- Profit for 3 months = 150000 x(3/12)
Therefore, Adam’s share = 37500 x (1/5)
- Profit on sale of ₹360000 = (90000/600000) x 360000
Therefore, Tej’s share = 54000 x (1/6)