Topic - 1 | Concepts and New Profit-Sharing Ratio:
Video Lectures [1]
Study Material & Notes
Study Material & Notes for the Chapter 7
Partnership – Death of a partner
I. DEATH OF A PARTNER – BASIC CONCEPTS
A. Meaning of Death of a Partner
Death of a partner is a compulsory retirement
Death of a partner may occur any time unlike the retirement which normally takes place at the end of an accounting period.
B. New Profit-Sharing Ratio
New Profit-Sharing ratio is the ratio in which the continuing/remaining partners decides to the share the profits of the firm in future. It is decided as per the mutual agreement amongst the continuing/remaining partners.
C. Gaining Ratio:
The ratio in which remaining partners acquire retiring partner’s profit share is known as gaining ratio.
Topic - 2 | Share of Profit/Loss till Partner’s Death:
Video Lectures [1]
Study Material & Notes
Study Material & Notes for the Chapter 7
Partnership – Death of a partner
II. CALCULATION OF PROFIT UP TO THE DATE OF DEATH OF A PARTNER
If the death of a partner occurs during the year, the representatives of the deceased partner are entitled to his/her share of profits earned till the date of his/her death. Such profit is ascertained by any of the following methods
Time Basis
Turnover or Sales basis
A. Calculation of Profit up to the Date of Death of a Partner – Time Basis
It is computed either on Previous Year Profit or Average Profit
Deceased Partner’s Share of Profits = Previous Year Profit X Time Till Death X Deceased Partner’s Share
12 or 365
Or
Deceased Partner’s Share of Profits = Average Profit X Time Till Death X Deceased Partner’s Share
Where, Average Profit = Total Profit
12 or 365
No. of Years
B. Calculation of Profit up to the Date of Death of a Partner – Sales or Turnover Basis
Deceased Partner’s Share of Profits = Last Year Profit X Sales Till Death X Deceased Partner’s Share
C. Accounting Treatment of Deceased Partner’s share in Profits
a) Through Profit & Loss Suspense Account – When New Profit-Sharing Ratio of the continuing partners does not differ from Old Profit-Sharing Ratio
b) Through Capital Transfer – When New Profit-Sharing Ratio of the continuing partners differs from Old Profit-Sharing Ratio
Topic - 3 | Amount Due to Legal Representative:
Video Lectures [2]
Study Material & Notes
Study Material & Notes for the Chapter 7
Partnership – Death of a partner
III. AMOUNT DUE TO LEGAL REPRESENTATIVE
A. Accounting Treatment
On the death of a partner, the accounting treatment regarding goodwill, revaluation of assets and reassessment of liabilities, accumulated reserves and undistributed profit are similar to that of the retirement of a partner.
B. Payment of Dues
On the death of a partner his/her claim is transferred to his/her executors or legal representatives and settled in the same manner as that of the retired partner.
C. Computation of Amount Due to the Legal Representative
The above adjustments are made in the capital account of the deceased partner and then the balance in the capital account is transferred to an account opened in the name of his/her executor
The payment of the amount of the deceased partner depends on the agreement. In the absence of an agreement, the legal representative of a deceased partner is entitled to interest @ 6% p.a. on the amount due from the date of death till the date of final payment
D. Deceased Partner’s Capital Account
Topic - 4 | Settlement of Executor’s Claim:
Video Lectures [2]
Study Material & Notes
Study Material & Notes for the Chapter 7
Partnership – Death of a partner
IV. SETTLEMENT OF EXECUTOR’S CLAIM
A. Settlement of Deceased Partner’s Executor’s Claim – In Lumpsum
Deceased partners’ executor’s claim is paid either out of the funds available with the firm or out of funds brought in by the remaining partners.
B. Settlement of Deceased Partner’s Executor’s Claim – In Installments
Amount due to deceased partner’s executor is paid in instalments. Usually, some amount is paid immediately and the balance is transferred to his loan account.
This loan is paid in one or more instalments and the loan amount carries some interest.
In the absence of any agreement on interest rate, the retiring partner can claim interest @ 6% [as per Section 37 of the Indian Partnership Act 1932]
Installment has two parts – Principal Amount of Loan and Interest at agreed rates
Interest due on loan amount is credited to deceased partners’ executor’s loan account.
Instalment inclusive of interest then is paid to the deceased partner’s executor as per schedule agreed upon.
