Right to Subsequent Profits

On the death of a partner, the firm may not cease to exist but certainly, the partnership ceases to exist. The other remaining partners may decide to continue the business. This is known as the Reconstitution of the partnership. However, in the case of death of a partner, his legal representative may have a right to subsequent profits in the firm.

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Right to Subsequent Profits

The accounting treatment on the death of a partner is similar to that on the retirement of the partner. On the death of a partner also we need to revalue the assets and liabilities, including goodwill and transfer the balance in the Revaluation account to the Partners Capital accounts. However, in this case, we receive the amount of the joint life policy for which the partners took it.

Provisions of the Partnership Act

As per section 37 of the Indian Partnership Act, 1932, where a partner dies and the surviving partners continue carrying the business of the firm without settling the accounts of the deceased partner, his legal representative has a right to the subsequent profits.

The settling of the accounts of the deceased partner implies paying him his share of revaluation profit, goodwill, joint life policy amount and capital. Subsequent profits imply profits after the death of a partner.

Learn more about Joint Life Policy in detail here.

Deceased partner’s or his Legal representative’s share in subsequent profits of the firm is the amount that is attributable to the use of his share of the property of the firm. Alternatively, he may also opt to receive interest at the rate of 6 percent per annum.

However, the above provisions do not apply in a case where the partners have entered into a contract to the contrary.

 

It is noteworthy here that if the surviving or the continuing partners have an option to purchase the interest of the deceased partner and they duly exercise it, then the legal representative of the deceased partner has no right to subsequent profits.

The legal representative has a right to subsequent profits until the accounts of the deceased partner are settled and the final payment made. 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.

Solved Example on Subsequent Profits

Manisha, Madhuri, and Juhi are partners sharing profits and losses equally. Juhi dies on 1^st October 2017. After making all the necessary adjustments for assets, liabilities, goodwill and Joint Life Policy, the capital accounts of the partners are ₹100000, ₹140000 and ₹240000 respectively. Manisha and Madhuri decide to continue the business. Juhi’s account is not settled until 1^st January 2018. The profit for the year is ₹180000. Assume the accounting year ends on 31^st March every year. Determine the option that the legal representative of Juhi shall choose.

Ans:

Option 1: Share in Subsequent Profits

Profit for the year = 180000

But, profit until 1^st October 2017 is already adjusted. Therefore, we need to pay him only the profit from 1^st October 2017 to 31^st December 2017 i.e. for 3 months. We assume that profits are earned evenly during the year.

Hence, profit for 3 months = 180000 x \(\frac{3}{12}\)

= 45000

$$ \text{Juhi’s share} = {45000 \times \frac{240000}{480000} } $$

= ₹22500

Option 2: Interest @ 6%

$$ \text{Interest} ={ 240000 \times \frac{6}{100} \times \frac{3}{12}} $$

= ₹3600

Conclusion: Since, share in subsequent profits is more beneficial, he should go for Option 1.