Accountancy · Ch 3 — Reconstitution of a Partnership Firm — Retirement/Death of a Partner
Death of a Partner
Death of a Partner
Death of a Partner — The Core Idea
When a partner dies, the partnership is dissolved as far as that partner is concerned. The accounting treatment is similar to retirement in almost every respect — the deceased partner's claim is calculated, adjusted for revaluations, goodwill, reserves, and accumulated profits/losses, and then transferred to an Executor's Account (instead of the partner's own account, since the partner is no longer alive).
The one critical difference is timing. Retirement usually happens at the end of an accounting period. Death can happen any time during the year. This means the deceased partner is entitled to profits (or losses) from the date of the last Balance Sheet up to the date of death — the intervening period.
The Intervening Period — Share of Profit/Loss
Since it is impractical to close the books and prepare final accounts for just a few months, the firm calculates the deceased partner's share of profit for the intervening period using one of three methods. The profit is credited to the deceased partner's Capital Account through a Profit & Loss Suspense Account.
Method 1: Based on Last Year's Profit
This is the simplest method. You take the profit of the immediately preceding financial year, adjust it for the time period, and apply the deceased partner's share.
Deceased Partner's Share = (Last Year's Profit) × (Period from last B/S to death / 12) × (Deceased Partner's Profit Share Ratio)
Example from the textbook: Bakul, Champak, and Darshan share profits 5:4:1. Profit for year ending March 31, 2017 was ₹1,00,000. Champak dies on June 30, 2017 (3 months into the new year). Champak's share:
₹1,00,000 × (3/12) × (4/10) = ₹10,000
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| June 30, 2017 | Profit & Loss Suspense A/c Dr. | 10,000 | ||
| To Champak's Capital A/c | 10,000 | |||
| (Champak's share of profit for the intervening period transferred to his capital account) |
Method 2: Based on Average Profits of Past Few Years
If the partnership deed specifies, you take the average of profits from the last 3 or 4 years, then calculate the share for the intervening period.
Example (same partners): Average profit of last 3 years (₹1,36,000 + ₹1,54,000 + ₹1,00,000) / 3 = ₹1,30,000. Champak's share for 3 months:
₹1,30,000 × (3/12) × (4/10) = ₹13,000
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| June 30, 2017 | Profit & Loss Suspense A/c Dr. | 13,000 | ||
| To Champak's Capital A/c | 13,000 |
Method 3: Based on Sales
If the agreement links profit to sales, you first find the profit-to-sales ratio from the previous year, then apply it to the sales of the intervening period.
Example: Previous year sales = ₹8,00,000, profit = ₹1,00,000. So profit per rupee of sales = ₹1,00,000 / ₹8,00,000 = ₹0.125. Sales from April 1 to June 30, 2017 = ₹1,50,000. Profit for the period = ₹1,50,000 × (₹1,00,000 / ₹8,00,000) = ₹18,750. Champak's share (4/10) = ₹7,500.
The textbook contains a typographical error in the journal entry for the sales-based method — it shows ₹2,500 as the debit amount instead of ₹7,500. The correct entry should debit Profit & Loss Suspense A/c by ₹7,500.
Closing the Profit & Loss Suspense Account
The Profit & Loss Suspense Account is a temporary account. Once the deceased partner's share is credited, this suspense account must be closed by transferring it to the Gaining Partners' Capital Accounts in their gaining ratio.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Gaining Partners' Capital A/c Dr. | (in gaining ratio) | |||
| To Profit & Loss Suspense A/c | (amount) | |||
| (P&L Suspense account transferred to gaining partners) |
Instead of two separate entries (one to credit the deceased partner and another to debit the gaining partners), you can pass a single combined entry: Debit the Gaining Partners' Capital Accounts (in gaining ratio) and Credit the Deceased Partner's Capital Account directly. This achieves the same result in one step.
Summary of Journal Entries at Death of a Partner
| S.No. | Transaction | Debit | Credit |
|---|---|---|---|
| 1 | Share of profit for intervening period | Profit & Loss Suspense A/c | Deceased Partner's Capital A/c |
| 2 | Transfer of P&L Suspense to gaining partners | Gaining Partners' Capital A/c (in gaining ratio) | Profit & Loss Suspense A/c |
| 3 | Alternative single entry for (1) & (2) | Gaining Partners' Capital A/c (in gaining ratio) | Deceased Partner's Capital A/c |
| 4 | Interest on capital | Interest on Capital A/c | Deceased Partner's Capital A/c |
| 5 | Share of reserves/accumulated profits | Reserve Fund / General Reserve A/c | Deceased Partner's Capital A/c |
| 6 | Share of accumulated losses | Deceased Partner's Capital A/c | Profit & Loss A/c (Dr. balance) |