On December 31, 2015, the Balance Sheet of Pinki, Qureshi and Rakesh stood as under:
Balance Sheet as on December 31, 2015
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| General Reserve | 20,000 | Buildings | 26,000 |
| Capitals: | Investments | 15,000 | |
| Pinki 15,000 | Debtors | 15,000 | |
| Qureshi 10,000 | Bills Receivable | 6,000 | |
| Rakesh 10,000 | 35,000 | Stock | 12,000 |
| Sundry Creditors | 25,000 | Cash | 6,000 |
| Total | 80,000 | Total | 80,000 |
The partnership deed provides that profits be shared in the ratio 2 : 1 : 1, and that in the event of the death of a partner his executors be entitled to be paid out:
- The capital standing to his credit at the date of the last Balance Sheet.
- His proportion of the reserves at the date of the last Balance Sheet.
- His proportion of the profits to the date of death, based on the average profits of the last three completed years, plus 10%.
- By way of goodwill, his proportion of the total profits for the three preceding years. The net profits for the last three years were:
| Year | Net Profit (₹) |
|---|---|
| 2013 | 16,000 |
| 2014 | 16,000 |
| 2015 | 15,400 |
Rakesh died on April 1, 2016 — that is, three months after the last Balance Sheet date of December 31, 2015 — so his share of profit is computed for the 3 months from January 1 to March 31, 2016. He had withdrawn ₹5,000 up to the date of his death. The investments were sold at par and Rakesh's executors were paid off.
Prepare Rakesh's Capital Account and his Executor's Account.
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Start your 14-day free trial to unlock the full solution →On a partner's death, his executors are paid the balance in his capital account after adding his share of reserves, goodwill and profit up to the date of death, and deducting his drawings. For Rakesh (1/4 share): capital ₹10,000 + reserve ₹5,000 + goodwill ₹11,850 + profit-to-death ₹1,086.25 − drawings ₹5,000 = ₹22,936.25, which is settled in cash through his Executor's Account.
When a partner dies, the firm does not stop — the surviving partners continue — but the deceased partner's estate must be fairly settled up to the exact date of death. The task is to work out everything the deceased has earned or owns in the firm, add it to his capital, subtract what he has already taken out as drawings, and pay the balance to his legal representatives (his "executors"). The amount is first collected in the deceased partner's own Capital Account, and the closing balance is then transferred to an Executor's Account, which is a liability of the firm until it is paid.
The partnership deed here specifies exactly what the executors get, so we follow it item by item. First, the capital standing to Rakesh's credit at the last Balance Sheet is ₹10,000 — this is his own money already in the firm. Second, his share of the General Reserve: reserves are undistributed past profits belonging to all partners in the profit-sharing ratio, so Rakesh's 1/4 of ₹20,000 is ₹5,000. Third, goodwill: the deed values his goodwill as his proportion of the total profits of the three preceding years — the three years total ₹16,000 + ₹16,000 + ₹15,400 = ₹47,400, and Rakesh's 1/4 share is ₹11,850. Because goodwill is not to be retained in the books, this amount is credited to Rakesh and borne by the continuing partners (Pinki and Qureshi) in their gaining ratio of 2 : 1. Fourth, his share of profit up to the date of death: since accounts are not closed on April 1, profit is estimated from the average of the last three completed years, ₹47,400 ÷ 3 = ₹15,800, increased by 10% to ₹17,380 per full year; Rakesh's portion is 1/4 of this for the 3 months elapsed = ₹17,380 × 1/4 × 3/12 = ₹1,086.25.
Adding these four credits gives ₹10,000 + ₹5,000 + ₹11,850 + ₹1,086.25 = ₹27,936.25. Against this we set his drawings of ₹5,000, the cash he had already withdrawn. The balance, ₹22,936.25, is the amount owed to his executors. Because the investments were sold at par (releasing cash) and the executors were paid off, the Executor's Account is closed by a cash payment rather than being carried as a loan.
Step-by-step working
- Rakesh's profit share = 1/4 (from the 2 : 1 : 1 ratio).
- Reserve share = 1/4 × ₹20,000 = ₹5,000.
- Total profit of three preceding years = ₹16,000 + ₹16,000 + ₹15,400 = ₹47,400.
- Goodwill share = 1/4 × ₹47,400 = ₹11,850.
- Average profit = ₹47,400 ÷ 3 = ₹15,800; plus 10% = ₹17,380.
- Profit to date of death (3 months) = ₹17,380 × 1/4 × 3/12 = ₹1,086.25. …
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