Settlement of the Retiring or Deceased Partner's Claim

After all the adjustments in Sections 2–5 are made, the firm arrives at the total amount finally due to the outgoing partner:

Amount due = Capital balance + Share of goodwill + Share of revaluation profit (− share of loss) + Share of reserves/accumulated profit (− share of accumulated loss) + Interest on capital, if allowed + Share of profit up to the date of death (death only) − Drawings − Interest on drawings, if charged.

Modes of settlement: the amount due may be (a) paid off immediately in full, by cash or cheque; (b) transferred entirely to a Loan Account in the outgoing partner's name (or, on death, an Executor's Loan Account) and paid later, in a lump sum or in instalments, together with interest; or (c) paid partly in cash and the balance transferred to a loan account. Under Section 37 of the Indian Partnership Act, 1932, if the amount due is left unpaid and the partnership deed is silent on the rate, the outgoing partner (or the executor) may choose, at his or her option, either interest at 6% per annum on the unpaid balance, or such share of the firm's subsequent profits as is attributable to the use of his or her share of the firm's property.

Deceased partner's share of profit up to the date of death. Because death can occur at any time during the year, while final accounts are drawn up only at the year-end, the deceased partner's share of the current year's profit for the period from the last Balance Sheet date to the date of death has to be specially estimated. Two commonly used bases are:

• Time basis: Share = Previous year's profit (or average of recent years) × (period elapsed ÷ 12 months) × deceased partner's profit share — assumes profit accrues evenly through the year.
• Turnover (sales) basis: Share = (Sales from the last Balance Sheet date to the date of death ÷ Previous year's total sales) × Previous year's profit × deceased partner's profit share — assumes profit is proportional to sales achieved. …