Death of a Partner
Accounting for Class 12 - West Bengal Board
1. Meaning of Death of a Partner
Definition
Death of a partner results in the dissolution of the partnership firm under the Indian Partnership Act, 1932. However, the partnership business may continue with the surviving partners if they agree.
Key Points:
- Automatic Dissolution: Partnership is dissolved by law upon death
- Continuation Option: Surviving partners may continue the business
- Settlement Required: Deceased partner's share must be settled with legal heirs
- Accounting Treatment: Similar to retirement but includes additional legal formalities
Problem 1: Basic Understanding
Question: A, B, and C are partners sharing profits in the ratio of 3:2:1. C dies on 31st March 2024. What happens to the partnership?
Solution:
Upon C's death on 31st March 2024:
- The partnership of A, B, and C is dissolved by operation of law
- A and B can continue the business as a new partnership
- C's share (1/6) will be transferred to A and B in their gaining ratio
- C's legal heir/executor must be paid the amount due
- A new partnership deed should be prepared between A and B
2. Treatment of Goodwill
Concept
Goodwill represents the value of the firm's reputation. When a partner dies, the deceased partner's share of goodwill must be compensated by the continuing partners.
Methods of Treatment:
- Hidden Goodwill Method: Goodwill is not recorded in books
- Premium Method: Continuing partners pay premium to deceased partner's account
- Revaluation Method: Goodwill is raised and then written off
Problem 2: Goodwill Treatment
Question: Ram, Shyam, and Mohan are partners sharing profits 2:2:1. Mohan dies. Goodwill of the firm is valued at ₹50,000. Prepare journal entries.
Solution:
Step 1: Calculate Mohan's share of goodwill = ₹50,000 × 1/5 = ₹10,000
Step 2: Calculate Gaining Ratio (assuming Ram and Shyam continue in same ratio 2:2 = 1:1)
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| - | Ram's Capital A/c ... Dr. | 5,000 | ||
| Shyam's Capital A/c ... Dr. | 5,000 | |||
| To Mohan's Capital A/c | 10,000 | |||
| (Being goodwill adjusted in gaining ratio) | ||||
3. Gaining Ratio
Definition
Gaining Ratio is the ratio in which the continuing partners acquire the share of the deceased partner.
Formula:
Gaining Ratio = New Ratio - Old Ratio
Problem 3: Calculating Gaining Ratio
Question: A, B, and C share profits in 5:3:2. C dies. A and B decide to share future profits in 3:2. Calculate gaining ratio.
Solution:
| Partner | Old Ratio | New Ratio | Gain |
|---|---|---|---|
| A | 5/10 | 3/5 | 3/5 - 5/10 = 6/10 - 5/10 = 1/10 |
| B | 3/10 | 2/5 | 2/5 - 3/10 = 4/10 - 3/10 = 1/10 |
Answer: Gaining Ratio of A:B = 1:1
Verification: C's share = 2/10 = 1/10 + 1/10 ✓
4. Revaluation of Assets and Liabilities
Purpose
To bring the assets and liabilities to their current market values at the date of death.
Procedure:
- Step 1: Open Revaluation Account
- Step 2: Record increase/decrease in asset values
- Step 3: Record increase/decrease in liability values
- Step 4: Transfer profit/loss to all partners' capital accounts in old ratio
Problem 4: Revaluation Account
Question: P, Q, and R are partners sharing profits equally. R dies. The following revaluations are made:
- Stock appreciated by ₹6,000
- Furniture depreciated by ₹3,000
- Provision for doubtful debts to be created ₹2,000
- Building appreciated by ₹15,000
Prepare Revaluation Account.
Solution:
| Revaluation Account | |||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Furniture A/c | 3,000 | By Stock A/c | 6,000 |
| To Provision for Doubtful Debts A/c | 2,000 | By Building A/c | 15,000 |
| To Profit transferred to: | |||
| P's Capital A/c | 5,333 | ||
| Q's Capital A/c | 5,333 | ||
| R's Capital A/c | 5,334 | ||
| Total | 21,000 | Total | 21,000 |
Note: Profit = ₹21,000 - ₹5,000 = ₹16,000 shared equally (₹16,000 ÷ 3 = ₹5,333.33 each)
5. Undistributed Profits and Losses
Treatment
Reserves, accumulated profits, or losses existing in the balance sheet must be distributed among all partners including the deceased partner in their old profit-sharing ratio.
Items to be Distributed:
- General Reserve
- Profit and Loss Account (Credit Balance)
- Workmen Compensation Reserve
- Investment Fluctuation Reserve
- Profit and Loss Account (Debit Balance) - Loss
Problem 5: Distribution of Reserves
Question: X, Y, and Z are partners sharing profits in 2:2:1. Z dies. Balance Sheet shows:
- General Reserve: ₹25,000
- Profit & Loss A/c (Cr.): ₹10,000
- Workmen Compensation Reserve: ₹15,000 (Liability ₹10,000)
Pass necessary journal entries.
Solution:
Calculations:
Z's share = 1/5
- General Reserve: ₹25,000 × 1/5 = ₹5,000
- P&L A/c: ₹10,000 × 1/5 = ₹2,000
- Excess WC Reserve: (₹15,000 - ₹10,000) × 1/5 = ₹1,000
| Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| General Reserve A/c ... Dr. | 25,000 | ||
| To X's Capital A/c | 10,000 | ||
| To Y's Capital A/c | 10,000 | ||
| To Z's Capital A/c | 5,000 | ||
| (Being General Reserve distributed) | |||
| Profit & Loss A/c ... Dr. | 10,000 | ||
| To X's Capital A/c | 4,000 | ||
| To Y's Capital A/c | 4,000 | ||
| To Z's Capital A/c | 2,000 | ||
| (Being P&L distributed) | |||
| Workmen Compensation Reserve A/c ... Dr. | 5,000 | ||
| To X's Capital A/c | 2,000 | ||
| To Y's Capital A/c | 2,000 | ||
| To Z's Capital A/c | 1,000 | ||
| (Being excess WC Reserve distributed) | |||
7. Interest on Capital (if applicable)
Concept
If the partnership deed provides for interest on capital, the deceased partner is entitled to interest on capital for the period from the beginning of the year till the date of death.
Formula:
Interest = Capital × Rate × (Time survived / 12)
Problem 8: Interest on Capital
Question: L, M, and N are partners with capitals ₹2,00,000, ₹1,50,000, and ₹1,00,000 respectively. N died on 30th September 2024. Interest on capital is allowed @ 10% p.a. Calculate interest on N's capital.
Solution:
N's Capital = ₹1,00,000
Rate of Interest = 10% p.a.
Period = 6 months (April to September)
Interest = ₹1,00,000 × 10% × (6/12)
= ₹1,00,000 × 0.10 × 0.5
= ₹5,000
| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Interest on Capital A/c ... Dr. | 5,000 | |
| To N's Capital A/c | 5,000 | |
| (Being interest on capital credited to N) | ||
8. Deceased Partner's Capital Account
Components
The deceased partner's capital account is credited with all amounts due and debited with all amounts owed.
Credit Side (Amounts Due To):
- Opening Capital Balance
- Share of Profit in Revaluation
- Share of Undistributed Profits/Reserves
- Share of Goodwill
- Share of Profit till death
- Interest on Capital
Debit Side (Amounts Due From):
- Drawings
- Share of Loss in Revaluation
- Share of Undistributed Losses
- Interest on Drawings (if applicable)
Problem 9: Complete Capital Account
Question: Prepare capital account of Z who died on 30th June 2024:
- Opening Capital: ₹80,000
- Drawings till death: ₹10,000
- Share of goodwill: ₹15,000
- Share of revaluation profit: ₹8,000
- Share of general reserve: ₹6,000
- Share of profit till death: ₹12,000
- Interest on capital: ₹2,400
Solution:
| Z's Capital Account | |||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Drawings A/c | 10,000 | By Balance b/d | 80,000 |
| To Z's Executor's A/c | 1,13,400 | By Continuing Partners' Capital A/c (Goodwill) |
15,000 |
| By Revaluation A/c | 8,000 | ||
| By General Reserve A/c | 6,000 | ||
| By Profit & Loss Suspense A/c | 12,000 | ||
| By Interest on Capital A/c | 2,400 | ||
| Total | 1,23,400 | Total | 1,23,400 |
Amount payable to Z's Executor = ₹1,13,400
9. Executor's Account
Definition
Executor's Account or Legal Heir's Account is opened to record the amount payable to the deceased partner's legal representatives.
Treatment:
- Debit Side: Payment made to executor
- Credit Side: Amount due from deceased partner's capital account
Journal Entry:
Deceased Partner's Capital A/c ... Dr.
To Executor's A/c
(Being amount due transferred to executor)
Problem 10: Executor's Account
Question: The amount due to C (deceased partner) is ₹1,50,000. It is agreed to pay:
- ₹50,000 immediately
- Balance in 2 equal installments along with interest @ 12% p.a.
Prepare C's Executor's Account (installments paid after 6 months each).
Solution:
Calculations:
- Immediate payment: ₹50,000
- Balance: ₹1,00,000
- Each installment: ₹50,000
- Interest on 1st installment: ₹1,00,000 × 12% × 6/12 = ₹6,000
- Interest on 2nd installment: ₹50,000 × 12% × 6/12 = ₹3,000
| C's Executor's Account | |||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Bank A/c (Immediate payment) |
50,000 | By C's Capital A/c | 1,50,000 |
| To Bank A/c (1st installment) |
50,000 | By Interest A/c (1st installment) |
6,000 |
| To Bank A/c (2nd installment) |
50,000 | By Interest A/c (2nd installment) |
3,000 |
| To Interest A/c | 9,000 | ||
| Total | 1,59,000 | Total | 1,59,000 |
10. Settlement of Amount Due to Deceased Partner
Methods of Settlement
- Lump Sum Payment: Full amount paid immediately
- Installment Payment: Amount paid in installments with interest
- Loan Method: Amount transferred to loan account
Problem 11: Settlement Options
Question: Amount due to deceased partner D is ₹2,00,000. Show journal entries for:
(a) Lump sum payment
(b) Loan creation
Solution:
(a) Lump Sum Payment:
| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| D's Capital A/c ... Dr. | 2,00,000 | |
| To D's Executor's A/c | 2,00,000 | |
| (Being amount transferred to executor) | ||
| D's Executor's A/c ... Dr. | 2,00,000 | |
| To Bank A/c | 2,00,000 | |
| (Being payment made to executor) | ||
(b) Loan Creation:
| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| D's Capital A/c ... Dr. | 2,00,000 | |
| To D's Executor's Loan A/c | 2,00,000 | |
| (Being amount converted to loan) | ||
11. New Profit-Sharing Ratio
Determination
After a partner's death, the continuing partners must agree on a new profit-sharing ratio.
Scenarios:
- Specified Ratio: New ratio is explicitly mentioned
- Old Ratio: Continue in the same ratio as before (excluding deceased)
- Equal Ratio: Share profits equally
Problem 12: New Ratio Calculation
Question: A, B, and C were partners sharing profits 4:3:2. C dies. Calculate:
(a) If A and B continue in old ratio
(b) If A and B decide to share equally
(c) If A and B decide to share in 5:3 ratio
Solution:
(a) Continue in Old Ratio:
Old ratio of A:B = 4:3
New Ratio of A:B = 4:3
(b) Equal Sharing:
New Ratio of A:B = 1:1
(c) Specified Ratio:
New Ratio of A:B = 5:3
Gaining Ratio for case (c):
| Partner | Old Ratio | New Ratio | Gain |
|---|---|---|---|
| A | 4/9 | 5/8 | 5/8 - 4/9 = 45/72 - 32/72 = 13/72 |
| B | 3/9 | 3/8 | 3/8 - 3/9 = 27/72 - 24/72 = 3/72 |
Gaining Ratio = 13:3
12. Journal Entries for Death of a Partner
Standard Journal Entries
Entry 1: Revaluation of Assets and Liabilities
For Increase in Asset Value:
Asset A/c ... Dr.
To Revaluation A/c
For Decrease in Asset Value:
Revaluation A/c ... Dr.
To Asset A/c
Entry 2: Transfer of Revaluation Profit/Loss
For Profit:
Revaluation A/c ... Dr.
To All Partners' Capital A/c (Old Ratio)
Entry 3: Distribution of Reserves
Reserve A/c ... Dr.
To All Partners' Capital A/c (Old Ratio)
Entry 4: Goodwill Adjustment
Continuing Partners' Capital A/c ... Dr. (Gaining Ratio)
To Deceased Partner's Capital A/c
Entry 5: Share of Profit till Death
Profit & Loss Suspense A/c ... Dr.
To Deceased Partner's Capital A/c
Entry 6: Interest on Capital
Interest on Capital A/c ... Dr.
To Deceased Partner's Capital A/c
Entry 7: Transfer to Executor
Deceased Partner's Capital A/c ... Dr.
To Executor's A/c / Executor's Loan A/c
Entry 8: Payment to Executor
Executor's A/c ... Dr.
To Bank A/c
Problem 13: Complete Journal Entries
Question: Record all journal entries for the following:
E, F, and G are partners sharing profits 2:2:1. G dies on 31st March 2024.
- Goodwill valued at ₹50,000
- Stock to be increased by ₹5,000
- General Reserve ₹20,000
- G's share of profit till death ₹8,000
- Amount due paid immediately
Solution:
| Date | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| 31-Mar-24 | Stock A/c ... Dr. | 5,000 | |
| To Revaluation A/c | 5,000 | ||
| (Being stock revalued) | |||
| 31-Mar-24 | Revaluation A/c ... Dr. | 5,000 | |
| To E's Capital A/c | 2,000 | ||
| To F's Capital A/c | 2,000 | ||
| To G's Capital A/c | 1,000 | ||
| (Being revaluation profit distributed in 2:2:1) | |||
| 31-Mar-24 | General Reserve A/c ... Dr. | 20,000 | |
| To E's Capital A/c | 8,000 | ||
| To F's Capital A/c | 8,000 | ||
| To G's Capital A/c | 4,000 | ||
| (Being reserve distributed) | |||
| 31-Mar-24 | E's Capital A/c ... Dr. | 5,000 | |
| F's Capital A/c ... Dr. | 5,000 | ||
| To G's Capital A/c | 10,000 | ||
| (Being goodwill adjusted: ₹50,000 × 1/5 = ₹10,000) | |||
| 31-Mar-24 | Profit & Loss Suspense A/c ... Dr. | 8,000 | |
| To G's Capital A/c | 8,000 | ||
| (Being share of profit credited) | |||
| 31-Mar-24 | G's Capital A/c ... Dr. | 23,000 | |
| To G's Executor's A/c | 23,000 | ||
| (Being amount transferred to executor) | |||
| 31-Mar-24 | G's Executor's A/c ... Dr. | 23,000 | |
| To Bank A/c | 23,000 | ||
| (Being payment made to executor) | |||
Note: G's total due = ₹1,000 + ₹4,000 + ₹10,000 + ₹8,000 = ₹23,000
13. Balance Sheet After Death of a Partner
Preparation
After recording all adjustments, prepare a new balance sheet showing the position of the reconstituted firm.
Key Changes:
- Assets are shown at revalued figures
- Liabilities include executor's account (if unpaid)
- Only continuing partners' capital accounts appear
- Goodwill may or may not appear
Problem 14: Complete Balance Sheet
Question: From the following information, prepare Balance Sheet after H's death:
Before Death (H, I, J - sharing 3:2:1):
| Liabilities | Assets | ||
|---|---|---|---|
| H's Capital | 60,000 | Building | 80,000 |
| I's Capital | 50,000 | Furniture | 30,000 |
| J's Capital | 40,000 | Stock | 40,000 |
| General Reserve | 30,000 | Debtors | 50,000 |
| Creditors | 20,000 | Cash | 20,000 |
| Total | 2,00,000 | Total | 2,20,000 |
Adjustments:
- Building appreciated by ₹20,000
- Stock depreciated by ₹5,000
- Goodwill ₹36,000 (not to appear in books)
- H's share of profit ₹9,000
- Amount due to H treated as loan
Solution:
Working Notes:
1. Revaluation Profit:
Building appreciation: ₹20,000
Stock depreciation: (₹5,000)
Net Profit: ₹15,000
H's share (3/6): ₹7,500
I's share (2/6): ₹5,000
J's share (1/6): ₹2,500
2. General Reserve Distribution:
H's share: ₹30,000 × 3/6 = ₹15,000
I's share: ₹30,000 × 2/6 = ₹10,000
J's share: ₹30,000 × 1/6 = ₹5,000
3. Goodwill (H's share):
H's share: ₹36,000 × 3/6 = ₹18,000
I pays (2/3): ₹12,000
J pays (1/3): ₹6,000
4. H's Capital:
Opening: ₹60,000
Add: Revaluation: ₹7,500
Add: Reserve: ₹15,000
Add: Goodwill: ₹18,000
Add: Profit: ₹9,000
Total: ₹1,09,500 (H's Executor's Loan)
5. New Capitals:
I: ₹50,000 + ₹5,000 + ₹10,000 - ₹12,000 = ₹53,000
J: ₹40,000 + ₹2,500 + ₹5,000 - ₹6,000 = ₹41,500
| Balance Sheet of I and J as at ... | |||
|---|---|---|---|
| Liabilities | Assets | ||
| Capitals: | Building | 1,00,000 | |
| I | 53,000 | Furniture | 30,000 |
| J | 41,500 | Stock | 35,000 |
| 94,500 | Debtors | 50,000 | |
| H's Executor's Loan | 1,09,500 | Cash | 20,000 |
| Creditors | 20,000 | P&L Suspense | 9,000 |
| Total | 2,24,000 | Total | 2,44,000 |
Note: P&L Suspense appears as asset as it represents profit yet to be earned.