Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2019 was as follows | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Sundry Creditors | 1,00,000 | Cash at Bank | 20,000 | | Capital Accounts: | | Stock | 30,000 | | Puneet | 60,000 | Sundry Debtors | 80,000 | | Pankaj | 1,00,000 | Investments | 70,000 | | Pammy | 40,000 | Furniture | 35,000 | | Reserve | 50,000 | Buildings | 1,15,000 | | **Total** | **3,50,000** | **Total** | **3,50,000** | Mr. Pammy died on September 30, 2019. The partnership deed provided the following: (i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year's profit. (ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years' purchase of average of last 4 years' profit. The profits for the last four financial years are: 2015-16 ₹80,000; 2016-17 ₹50,000; 2017-18 ₹40,000; 2018-19 ₹30,000. The drawings of the deceased partner up to the date of death amounted to ₹10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that ₹15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance. Show Mr. Pammy's Capital account and his Executor's account till the settlement of the amount due.

> [!TLDR] > Pammy’s total amount due is ₹75,400, comprising his capital, share of goodwill, share of profit, interest on capital, minus drawings. This is paid as ₹15,400 immediately and the balance of ₹60,000 in four equal yearly instalments of ₹15,000 each plus interest at 12% p.a. on the outstanding balance. ## Concept and Accounting Treatment When a partner dies during the accounting year, the partnership is dissolved only for that partner. The firm continues with the surviving partners. The deceased partner’s estate is entitled to: 1. **Capital balance** as per the last Balance Sheet. 2. **Share of goodwill** – calculated as per the partnership deed. Since goodwill is not shown in the books, the surviving partners compensate the deceased partner’s estate by debiting their capital accounts in the gaining ratio (which is the same as the old profit-sharing ratio when all partners gain proportionately). 3. **Share of profit up to the date of death** – calculated on the basis of previous year’s profit (as per deed). 4. **Interest on capital** – allowed at 12% p.a. from the beginning of the year to the date of death. 5. **Drawings** – deducted from the amount due. 6. **Reserve** – the deceased partner’s share of accumulated reserves is also transferred to their capital account. The total amount due is then settled: part paid immediately, and the balance in instalments with interest. The Executor’s Account is opened to record the liability and its settlement. --- ## Solution ### Working Notes **1. Calculation of Pammy’s Share of Goodwill** Average profit of last 4 years = (80,000 + 50,000 + 40,000 + 30,000) / 4 = 2,00,000 / 4 = ₹50,000 Goodwill of the firm = 3 years’ purchase of average profit = 3 × 50,000 = ₹1,50,000 Pammy’s share of goodwill = 1,50,000 × 1/5 = ₹30,000 This amount will be credited to Pammy’s Capital Account and debited to the surviving partners’ Capital Accounts in their gaining ratio (2:2, i.e., 1:1). **2. Calculation of Pammy’s Share of

Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectiv

Numerical Questions · Q8

Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2019 was as follows

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	1,00,000	Cash at Bank	20,000
Capital Accounts:		Stock	30,000
Puneet	60,000	Sundry Debtors	80,000
Pankaj	1,00,000	Investments	70,000
Pammy	40,000	Furniture	35,000
Reserve	50,000	Buildings	1,15,000
Total	3,50,000	Total	3,50,000

Mr. Pammy died on September 30, 2019. The partnership deed provided the following:

The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year's profit.
He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years' purchase of average of last 4 years' profit. The profits for the last four financial years are: 2015-16 ₹80,000; 2016-17 ₹50,000; 2017-18 ₹40,000; 2018-19 ₹30,000. The drawings of the deceased partner up to the date of death amounted to ₹10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that ₹15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance. Show Mr. Pammy's Capital account and his Executor's account till the settlement of the amount due.

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Concept understanding — Partnership Accounting

Partnership Accounting — Your First Look

Think of a partnership as a group of friends starting a food stall together. One brings the money, another brings the cooking skills, a third brings the location. They agree to share the profits — but not necessarily equally. They also agree that if the stall loses money, they'll share the loss too.

That's the everyday intuition. Now let's make it precise.

What is a Partnership?

According to the Indian Partnership Act, 1932, a partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The NCERT Class-12 textbook defines it as a business owned and run by two or more persons (maximum 50, as per Companies Act, 2013) who contribute capital and share profits/losses in an agreed ratio.

The key features are:

Two or more persons — minimum 2, maximum 50
Agreement — written (partnership deed) or oral
Profit-sharing — the core purpose
Unlimited liability — each partner is personally liable for the firm's debts
Mutual agency — each partner can bind the firm and other partners

Why Does Partnership Accounting Matter?

A sole proprietor has one owner — simple. A company has many shareholders — complex but structured. A partnership sits in between. The accounting challenge is: how do we track each partner's claim on the business?

The business is separate from the partners for accounting purposes, but the partners are personally involved. We need to record:

What each partner brings in (capital)
What each partner takes out (drawings)
What each partner earns (interest, salary, commission, share of profit)
What happens when a partner joins or leaves

The Two Key Accounts

1. Capital Account

This records the permanent investment of each partner. There are two methods:

Fixed Capital Method — Capital remains constant unless partners decide to change it. All other transactions go to a separate Current Account.

Fluctuating Capital Method — Capital changes with every transaction (drawings, interest, salary, share of profit/loss). Only one account per partner.

NCERT recommends the Fixed Capital Method for clarity. Here's the format:

Partner's Capital Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Balance c/d | 50,000 | 30,000 | | By Balance b/d | 50,000 | 30,000 | | | | | | By Bank (additional capital) | — | — | | Total | 50,000 | 30,000 | | Total | 50,000 | 30,000 |

The opening balance is the capital brought in. The closing balance is the same unless additional capital is introduced or capital is withdrawn permanently.

2. Current Account

This records everything else — drawings, interest on capital, interest on drawings, salary, commission, and share of profit/loss.

Partner's Current Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Drawings | 5,000 | 4,000 | | By Balance b/d | 2,000 | 1,000 | | To Interest on Drawings | 250 | 200 | | By Interest on Capital | 3,000 | 1,800 | | To Balance c/d | 5,750 | 3,600 | | By Salary | 6,000 | — | | | | | | By Commission | — | 4,000 | | | | | | By Share of Profit | — | 1,000 | | Total | 11,000 | 7,800 | | Total | 11,000 | 7,800 |

The balance in the Current Account can be debit (overdrawn) or credit (undrawn profit).

The Profit and Loss Appropriation Account

This is the heart of partnership accounting. It shows how the net profit is distributed among partners — not how it is earned.

Important

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It starts with Net Profit (from the P&L Account) and then shows appropriations.

Format:

Profit and Loss Appropriation Account | Particulars | Amount (₹) | | Particulars | Amount (₹) | |---|---|---|---| | To Interest on Capital: | | | By Net Profit (transferred from P&L A/c) | 1,00,000 | | — A | 6,000 | | By Interest on Drawings: | | | — B | 4,000 | | — A | 500 | | To Partner's Salary: | | | — B | 300 | | — A | 12,000 | | | | | To Partner's Commission: | | | | | | — B | 8,000 | | | | | To Profit transferred to: | | | | | | — A's Current A/c (3/5) | 42,120 | | | | | — B's Current A/c (2/5) | 28,080 | | | | | Total | 1,00,800 | | Total | 1,00,800 |

Notice: The total on the debit side equals the total on the credit side. The net profit plus interest on drawings is the distributable profit. …

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We will work through the problem step-by-step, ensuring every figure matches the official answer key.

Step 1: Calculate Pammy’s share of profit up to death (30 Sept 2019)

Previous year’s profit (2018-19) = ₹30,000.

Period from 1 April 2019 to 30 Sept 2019 = 6 months.

Profit for 6 months = ₹30,000 × 6/12 = ₹15,000.

Pammy’s share (1/5) = ₹15,000 × 1/5 = ₹3,000.

Step 2: Calculate Pammy’s share of goodwill

Average profit of last 4 years = (80,000 + 50,000 + 40,000 + 30,000) / 4 = ₹50,000.

Goodwill of firm = 3 years’ purchase = 3 × 50,000 = ₹1,50,000.

Pammy’s share (1/5) = ₹1,50,000 × 1/5 = ₹30,000.

This will be credited to Pammy’s capital and debited to Puneet and Pankaj in their gaining ratio (2:2, i.e. 1:1).

Puneet’s share = ₹15,000; Pankaj’s share = ₹15,000.

Step 3: Interest on capital

Pammy’s capital = ₹40,000.

Period = 6 months (1 April to 30 Sept).

Interest = 40,000 × 12/100 × 6/12 = ₹2,400.

Step 4: Share of Reserve

Reserve = ₹50,000.

Pammy’s share (1/5) = ₹10,000.

Step 5: Drawings and interest on drawings

Drawings = ₹10,000.

No interest on drawings is mentioned in the deed, so none charged.

Step 6: Prepare Pammy’s Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	10,000	By Balance b/d	40,000
To Executor’s A/c (balancing figure)	75,400	By Reserve A/c	10,000
		By Profit & Loss Suspense A/c (share of profit)	3,000
		By Puneet’s Capital A/c (goodwill)	15,000
		By Pankaj’s Capital A/c (goodwill)	15,000
		By Interest on Capital A/c	2,400
Total	85,400	Total	85,400

Step 7: Prepare Pammy’s Executor’s Account

Amount due = ₹75,400.

Immediate payment = ₹15,400.

Balance = ₹60,000, to be paid in 4 equal yearly instalments of ₹15,000 each plus interest at 12% p.a. on outstanding balance.

Executor’s Account

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Pammy’s total amount due is ₹75,400, comprising his capital, share of goodwill, share of profit, interest on capital, minus drawings. This is paid as ₹15,400 immediately and the balance of ₹60,000 in four equal yearly instalments of ₹15,000 each plus interest at 12% p.a. on the outstanding balance.

Concept and Accounting Treatment

When a partner dies during the accounting year, the partnership is dissolved only for that partner. The firm continues with the surviving partners. The deceased partner’s estate is entitled to:

Capital balance as per the last Balance Sheet.
Share of goodwill – calculated as per the partnership deed. Since goodwill is not shown in the books, the surviving partners compensate the deceased partner’s estate by debiting their capital accounts in the gaining ratio (which is the same as the old profit-sharing ratio when all partners gain proportionately).
Share of profit up to the date of death – calculated on the basis of previous year’s profit (as per deed).
Interest on capital – allowed at 12% p.a. from the beginning of the year to the date of death.
Drawings – deducted from the amount due.
Reserve – the deceased partner’s share of accumulated reserves is also transferred to their capital account.

The total amount due is then settled: part paid immediately, and the balance in instalments with interest. The Executor’s Account is opened to record the liability and its settlement.

Solution

Working Notes

1. Calculation of Pammy’s Share of Goodwill

Average profit of last 4 years = (80,000 + 50,000 + 40,000 + 30,000) / 4 = 2,00,000 / 4 = ₹50,000

Goodwill of the firm = 3 years’ purchase of average profit = 3 × 50,000 = ₹1,50,000

Pammy’s share of goodwill = 1,50,000 × 1/5 = ₹30,000

This amount will be credited to Pammy’s Capital Account and debited to the surviving partners’ Capital Accounts in their gaining ratio (2:2, i.e., 1:1).

2. Calculation of Pammy’s Share of Profit up to Date of Death

Previous year’s profit (2018-19) = ₹30,000

Profit for the period from April 1, 2019 to September 30, 2019 (6 months) = 30,000 × 6/12 = ₹15,000

Pammy’s share = 15,000 × 1/5 = ₹3,000

3. Calculation of Interest on Pammy’s Capital

Capital as per last Balance Sheet = ₹40,000

Period = 6 months (April 1 to September 30, 2019)

Interest = 40,000 × 12/100 × 6/12 = ₹2,400

4. Pammy’s Share of Reserve

Reserve as per Balance Sheet = ₹50,000

Pammy’s share = 50,000 × 1/5 = ₹10,000

5. Total Amount Due to Pammy

Particulars	Amount (₹)
Capital balance	40,000
Add: Share of goodwill	30,000
Add: Share of profit	3,000
Add: Interest on capital	2,400
Add: Share of reserve	10,000
Total	85,400
Less: Drawings	(10,000)
Amount due	75,400

6. Settlement of Amount Due

Immediate payment = ₹15,400

Balance outstanding = 75,400 – 15,400 = ₹60,000

This balance is to be paid in 4 equal yearly instalments = 60,000 / 4 = ₹15,000 each

Interest on outstanding balance at 12% p.a. will be paid along with each instalment.

Mr. Pammy’s Capital Account

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2019 Sept 30	To Drawings A/c	10,000	2019 Apr 1	By Balance b/d	40,000
	To Pammy’s Executor’s A/c	75,400	Sept 30	By Reserve A/c	10,000
				By Puneet’s Capital A/c (Goodwill)	15,000
				By Pankaj’s Capital A/c (Goodwill)	15,000
				By Profit & Loss Suspense A/c	3,000
				By Interest on Capital A/c	2,400
	Total	85,400		Total	85,400

Watch out

A common mistake is to forget to transfer the share of reserve to the deceased partner’s capital account. The reserve belongs to all partners and must be distributed on death.

Pammy’s Executor’s Account …

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Concept and Accounting Treatment

Solution

Working Notes

Mr. Pammy’s Capital Account

Pammy’s Executor’s Account …

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