A, B and C carried on business in partnership sharing profits and losses in the proportion of 3 : 2 : 1. Their capitals were as under as per the Balance Sheet as on 30th June, 2021: A—₹30,000; B—₹20,000; C—₹15,000. On 31st March, 2022 C died, and you are instructed to prepare an

Question

A, B and C carried on business in partnership sharing profits and losses in the proportion of 3 : 2 : 1. Their capitals were as under as per the Balance Sheet as on 30th June, 2021: A—₹30,000; B—₹20,000; C—₹15,000. On 31st March, 2022 C died, and you are instructed to prepare an account for presentation to his executors having regard to the following facts: (i) Interest on Capital @ 12% per annum (ii) C's drawings from 1st July, 2021 to the date of his death amounted to ₹4,500 (iii) C's share of profits for the portion of the current financial year for which he lived was to be taken at the sum calculated on the average of the last three completed years and goodwill was to be raised on the basis of two years' purchase of the average profit of those three years. The annual profits were ₹19,000; ₹16,000 and ₹19,000 respectively. Prepare C's Capital Account.

Accepted Answer

>

> [!TLDR]
> C's executors are entitled to his capital, a proportionate interest on that capital, his share of goodwill (based on 2 years' purchase of the average profit), and his share of profit up to the date of death — less his drawings — totalling ₹20,100.
>
> **Period involved:** 1st July 2021 to 31st March 2022 = 9 months.
>
> **Step 1 — Interest on Capital @ 12% p.a. for 9 months**
> = 15,000 × 12% × 9/12 = ₹1,350
>
> **Step 2 — Average profit of last three years**
> Annual profits: ₹19,000, ₹16,000, ₹19,000. Average = 54,000/3 = ₹18,000
>
> **Step 3 — Goodwill (2 years' purchase of average profit)**
> Total firm goodwill = 18,000 × 2 = ₹36,000.
> C's share (profit ratio 3:2:1, so C = 1/6) = 36,000 × 1/6 = ₹6,000, to be contributed by the continuing partners A and B (debited to their Capital Accounts in their gaining ratio — here taken as their old mutual ratio 3:2, since no other arrangement is given):
> A's Capital A/c Dr ₹3,600 (6,000 × 3/5); B's Capital A/c Dr ₹2,400 (6,000 × 2/5)
>    To C's Capital A/c ₹6,000
>
> **Step 4 — C's share of profit for 9 months (based on the 3-year average)**
> = Average Profit × C's share × (period/12) = 18,000 × 1/6 × 9/12 = 3,000 × 9/12 = ₹2,250
> (Debited to a Profit & Loss Suspense Account and credited to C's Capital Account.)
>
> **C's Capital Account** …

Dr.	Retiring Partner's Capital Account	Cr.
Particulars	Amount (₹)	Particulars
To Revaluation A/c (loss)	xxx	By Balance b/d
To Goodwill A/c (if written off)	xxx	By Revaluation A/c (gain)
To Retiring Partner's Loan A/c	xxx	By General Reserve A/c
To Bank A/c (final payment)	xxx	By Profit & Loss A/c
		By Goodwill A/c (remaining partners)
		By Interest on Capital (if any)
Total	xxx	Total

Concept understanding — Partner Retirement Methods

Partner Retirement Methods – A First Look

What Does "Retirement of a Partner" Mean?

Why Does This Matter?

The Accounting Treatment – Step by Step

Step 1: Revalue Assets and Reassess Liabilities

Step 2: Adjust for Goodwill

Step 3: Transfer Reserves and Accumulated Profits

Step 4: Settle the Retiring Partner's Account

The Capital Account Format (as per NCERT)

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