Q.How will you compute the amount payable to a deceased partner?

When a partner dies, the amount payable to their legal representatives is not simply their capital balance. It is the partner’s total claim on the firm, calculated by adjusting their capital account for all accumulated profits, reserves, revaluations, and their share of goodwill up to the date of death.

The computation follows these steps:

1. Opening Capital Balance – Start with the deceased partner’s capital as per the last Balance Sheet.
2. Share of Reserves & Accumulated Profits – Add their share of General Reserve, Profit & Loss (Cr.) balance, Workmen Compensation Fund (excess), etc.
3. Share of Goodwill – Add their share of the firm’s goodwill (valued as per agreement). The continuing partners compensate this in their gaining ratio.
4. Share of Revaluation Profit/Loss – Add (or subtract) their share of the net gain/loss from revaluing assets and liabilities to their current values.
5. Share of Profit till Death – Add their share of profit from the last Balance Sheet date to the date of death. This is usually computed on the last year’s profit or an average, using the time ratio.
6. Interest on Capital (if applicable) – Add interest for the period up to death.
7. Drawings & Interest on Drawings – Subtract any drawings made during the period and add interest on drawings (if charged).
8. Salary/Commission – Add any salary or commission due to the partner up to the date of death.

The final figure after all these adjustments is the amount payable to the deceased partner’s estate.

Concept and Accounting Treatment

When a partner dies, the partnership is dissolved in the eyes of law, but the business may continue with the surviving partners. The deceased partner's estate is entitled to receive the amount due as on the date of death. This amount is not simply the capital account balance — it must be recalculated by considering several adjustments that would have been made if the partner were retiring on that date.

The key principle is that the deceased partner should receive everything they are entitled to up to the moment of death, as if the accounts were closed on that date. This includes:

1. Capital balance as per the last balance sheet
2. Share of accumulated reserves and profits (e.g., General Reserve, Profit & Loss credit balance)
3. Share of revaluation gains/losses on assets and liabilities
4. Share of goodwill (unless already adjusted)
5. Share of profits from the last balance sheet date to death (calculated on time basis)
6. Interest on capital (if provided in deed) up to death
7. Share of joint life policy proceeds (if any)
8. Less: Drawings made after last balance sheet
9. Less: Interest on drawings (if applicable)

The final amount is transferred to the Deceased Partner's Executor's Account (or Executor's Loan Account) for settlement.

Step-by-Step Computation Method

Let me walk through the complete process with a standard format. Assume we have Partner A who dies on 30th June 2024, and the last balance sheet was on 31st March 2024.

Step 1: Start with Opening Capital Balance

Take the capital account balance as per the last balance sheet. This is the starting point.

Step 2: Add Share of Reserves and Accumulated Profits

If the partnership has a General Reserve or Profit & Loss credit balance, the deceased partner gets their profit-sharing ratio share of these.

Example: If General Reserve is ₹1,00,000 and A's share is 3/10, then A gets ₹30,000.

Step 3: Add Share of Revaluation Profit (or deduct loss)

Revalue all assets and liabilities to their current market values. The net gain or loss is shared among all partners in their old profit-sharing ratio.

Working Note:

• Increase in value of land: ₹50,000
• Decrease in value of machinery: ₹20,000
• Net revaluation profit: ₹30,000
• A's share (3/10): ₹9,000

Step 4: Add Share of Goodwill

Goodwill is valued as per the partnership deed (often at 2-3 years' purchase of average profits). The deceased partner's share is credited to their capital account and debited to the surviving partners' capital accounts in their gaining ratio.

Step 5: Add Share of Profit up to Death

This is calculated on a time basis from the last balance sheet date to the date of death. Two methods are common:

Method A: Based on last year's profit

Profit for the period = (Last year's profit × Months since last balance sheet) / 12

Method B: Based on average profits of past years

Average profit = Total profits of past years / Number of years

Profit for period = (Average profit × Months since last balance sheet) / 12

Step 6: Add Interest on Capital (if applicable)

If the deed provides for interest on capital, calculate it for the period from the beginning of the current year to the date of death.

Working Note:

Capital: ₹2,00,000

Rate: 10% p.a.

Period: 3 months (April to June)

Interest = ₹2,00,000 × 10/100 × 3/12 = ₹5,000

Step 7: Deduct Drawings and Interest on Drawings

Any amounts withdrawn by the deceased partner after the last balance sheet date are deducted. If interest on drawings is charged, deduct that too.

Step 8: Add Share of Joint Life Policy

If the firm has a Joint Life Policy, the deceased partner's share of the policy proceeds (usually the surrender value or the sum assured) is added.

Complete Working Notes Format

Here's how you would present the computation in an exam:

Working Note: Calculation of Amount Due to Deceased Partner A

Journal Entry for Transfer

When the final amount is determined, the journal entry is:

Settlement of the Amount

The amount due to the executor can be paid in various ways:

• Lump sum payment immediately
• In installments with interest
• Transferred to a Loan Account bearing interest

The partnership deed usually specifies the mode of payment. If not, the amount is paid as per mutual agreement.