139 PARTNERSHIP ACCOUNTS 8.

139

UNIT – 5 DEATH OF A PARTNER

LEARNING OUTCOMES

After studying this unit, you would be able to:

♦ Understand the implication of the excess money received on death of a partner from a joint life policy
from the insurance company in the accounts of the partnership. Learn the journal entries required to
record this transaction.
♦ Understand the accounting implications if death of a partner takes place at any date during the
accounting period. Learn to record this transaction and how to record payment of profit to the Executor
of the deceased partner for part of the accounting year.
♦ Be familiar with other accounting treatments in case of death of partner which are similar to the explained
in case of retirement of a partner.

UNIT OVERVIEW
Revaluation Account
or Profit and Loss
Adjustment Account
for revaluation of
assets and liabilities

Treatment of JLP
Payment of Deceased
and separate life
Partner's Share
policies
Death
of partner

Profit/loss on Transfer of reserves;

revaluation account is goodwill, Transfer of
is transfer to old profit/loss on
partners in their old revaluation to dead
profit sharing ratio partner

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8.140 PRINCIPLES AND PRACTICE OF ACCOUNTING

5.1 INTRODUCTION
Business of a partnership firm may not come to an end due to death of a partner as it is known as Reconstitution
of Partnership. Other partners shall continue to run the business of the firm. The problems arising on the death
of a partner are similar to those arising on retirement. Assets and liabilities have to be revalued and the resultant
profit or loss has to be transferred to the capital accounts of all partners including the deceased partner. Goodwill
is dealt with exactly in the way already discussed in the case of retirement in the earlier unit. Treatment of joint
life policy will also be same as in the case of retirement. However, in case of death of a partner, the firm would
get the joint policy value.

5.2 RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO

SHARE SUBSEQUENT PROFITS
As per provisions of Section 37 of the Indian Partnership Act., “Where any member of a firm has died or otherwise
ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property
of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then,
in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself
or his representatives to such share of the profits made since he ceased to be a partner as may be attributable
to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount
of his share in the property of the firm.
Provided that whereby contract between the partners an option is given to surviving or continuing partners to
purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the
deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other
share of profits; but if any partner assuming to act in exercise of the option does not in all material respects
comply with the terms thereof, he is liable to account under the foregoing provisions of this section. This way, the
outgoing partner has the option to receive, interest at the rate of 6% p.a. or the share of profit earned on the
unsettled amounts for the period till his dues are settled by the firm in the absence of any contract made to the
contrary”.
It may be noted that the outgoing partner is not bound to make election until the share of the profit that would be
payable to him has been ascertained.
For example, A, B and C are in a partnership business-sharing profits and losses equally. C died on 31st October,
2019. The capitals of the partners, after all necessary adjustments stood at ` 50,000, `75,000 and
` 1,20,000 respectively. A and B continued to carry on the business further without settling the accounts of C.
Final payment to C is made on February 1, 2020. The profit made during the period of three months amounts to
` 28,000.
Under Section 37 of the Partnership Act, C can exercise any of the following two options.
(i) Share in subsequent profits of firm:
Profit made—` 28,000
1,20,000
C’s share – 28,000× = ` 13,714
2,45,000

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141 PARTNERSHIP ACCOUNTS 8.141

(ii) Interest at 6% p.a.

6 3
1,20,000× x = ` 1,800
100 12
Since, (i) option is beneficial for C, he will necessarily go for his proportionate share in profits.

5.3 AMOUNT PAYABLE TO LEGAL REPRESENTATIVES OF DEAD

PARTNER
When the partner dies the amount payable to him/her is paid to his/her legal representatives. The representatives
are entitled to the followings:
(a) The amount standing to the credit to the capital account of the deceased partner
(b) Interest on capital, if provided in the partnership deed upto the date of death:
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities;
(f) Share of profit upto the date of death;
(g) Share of Joint Life Policy.
Legal representatives are liable for:
(i) Drawings
(ii) Interest on drawings
(iii) Share of loss on the revaluation of assets and liabilities;
(iv) Share of loss that have occurred till the date of his/her death.
Calculation of profit upto the date of death of a partner.
Such Profit is calculated through P&L Suspense account. After ascertaining the amount due to the deceased
partner, it should be credited to his Executor’s Account.
If the death of a partner occurs during the year, the representatives of the deceased partner are entitled to his/her
share of profits earned till the date of his/her death. Such profit is ascertained by any of the following methods:
(i) Time Basis
(ii) Turnover or Sales Basis
(i) Time Basis
In this case, it is assumed that profit has been earned uniformly throughout the year. For example:
The total profit of previous year is ` 2,25,000 and a partner dies three months after the close of previous year,
the profit of three months is ` 31,250 i.e. 1,25,000 × 3/12, if the deceased partner took 2/10 share of profit,
his/her share of profit till the date of death is ` 6,250 i.e. ` 31,250 × 2/10

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8.142 PRINCIPLES AND PRACTICE OF ACCOUNTING

(ii) Turnover or Sales Basis

In this method, we have to take into consideration the profit and the total sales of the last year. Thereafter the
profit up to the date of death is estimated on the basis of the sale of the last year. Profit is assumed to be earned
uniformly at the same rate.
Arun, Tarun and Neha are partners sharing profits in the ratio of 3:2:1. Neha dies on 31st May 2020. Sales for
the year 2019-2020 amounted to ` 4,00,000 and the profit on sales is ` 60,000. Accounts are closed on
31 March every year. Sales from 1st April 2020 to 31st May 2020 is ` 1,00,000.
Calculate the deceased partner’s share in the profit upto the date of death.

SOLUTION

Profit from 1st April 2020 to 31st May 2020 on the basis of sales:
If sales are ` 4,00,000, profit is ` 60,000
If the sales are ` 1,00,000 profit is: 60,000/4,00,000 × 1,00,000 = ` 15,000
Neha’s share = 15,000 × 1/6 = ` 2,500
Alternatively profit is calculated as
60,000
Rate of profit = x 100 = 15%
4,00,000

Sale upto date of death = 1,00,000

Profit = 1,00,000 x 15/100 = ` 15,000
The above adjustments are made in the capital account of the deceased partner and then the balance in the
capital account is transferred to an account opened in the name of his/her executor. The payment of the amount
of the deceased partner depends on the agreement. In the absence of an agreement, the legal representative of
a deceased partner is entitled to interest @ 6% p.a. on the amount due from the date of death till the date of final
payment

5.4 SPECIAL TRANSACTIONS IN CASE OF DEATH: JOINT LIFE

POLICY
In case of Partnership, Partners generally get Joint Life Policy(JLP) in name of all partners. If partner expires,
then partners are entitled for share in JLP.

Joint Life Policy

Surrender Value Joint Life Policy

Premium Method
Method Reserve Method

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143 PARTNERSHIP ACCOUNTS 8.143

Method 1: If Joint Life Policy does not appear in the Balance Sheet, then the firm will gain on the death of a
partner. For example, A, B and C are in partnership sharing profits and losses at the ratio of 5:3:2. They took a
Joint Life Policy of ` 1,00,000. Now, if A dies, the firm will receive ` 1,00,000 from the insurance company.
The journal entries will appear as follows:
` `
(i) Bank A/c Dr. 1,00,000
To Joint Life Policy A/c 1,00,000
(Policy value received from the insurance company on
A’s death)
(ii) Joint Life Policy A/c Dr. 1,00,000
To A’s Capital A/c 50,000
To B’s Capital A/c 30,000
To C’s Capital A/c 20,000
(Joint Life Policy written off and credited to old partners in
Profit Sharing Ratio)

Method 2: If Joint Life Policy appears in the Balance Sheet at surrender value, then the firm will gain on the
death of a partner. For example, A, B and C are in partnership sharing profits and losses at the ratio of 5:3:2.
They took a Joint Life Policy of ` 1,00,000 which is appearing in the Balance Sheet at the surrender value of
` 10,000. Now, if A dies, the firm will receive ` 1,00,000 from the insurance company.
The journal entries will appear as follows:
` `
(i) Bank A/c Dr. 1,00,000
To Joint Life Policy A/c 1,00,000
(Policy value received from the insurance company on
A’s death)
(ii) Joint Life Policy A/c Dr. 90,000
To A’s Capital A/c 45,000
To B’s Capital A/c 27,000
To C’s Capital A/c 18,000
(Joint Life Policy written off and credited to old partners in Profit Sharing
Ratio)

Method 3:
If Joint Life Policy appears in the Balance Sheet at surrender value along with Joint Life Policy Reserve, then the
firm will gain on the death of a partner and reserve will be distributed among partners. For example, A, B and C
are in partnership sharing profits and losses at the ratio of 5:3:2. They took a Joint Life Policy of ` 1,00,000 which
is appearing in the Balance Sheet at the surrender value of ` 10,000,along with JLP reserve. Now, if A dies, the
firm will receive ` 1,00,000 from the insurance company.

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8.144 PRINCIPLES AND PRACTICE OF ACCOUNTING

The journal entries will appear as follows:

` `
(i) Bank A/c Dr. 1,00,000
To Joint Life Policy A/c 1,00,000
(Policy value received from the insurance company on A’s death)
(ii) Joint Life Policy A/c Dr. 90,000
To A’s Capital A/c 45,000
To B’s Capital A/c 27,000
To C’s Capital A/c 18,000
(Joint Life Policy written off and credited to old partners in Profit
Sharing Ratio)
(iii) Joint Life Policy Reserve A/c Dr. 10,000
To A’s Capital A/c 5,000
To B’s Capital A/c 3,000
To C’s Capital A/c 2,000
(Joint Life Policy reserved written off and credited to old partners in
Profit Sharing Ratio)

5.5 SPECIAL TRANSACTIONS IN CASE OF DEATH: SEPARATE LIFE

POLICY
Instead of taking one joint life policy in the names of all the partners, the partners may take individual policies on
the lives of respective partners. The premium paid is charged to profit and loss account. On the death of a partner
then only the amount for which the deceased partner was insured would be recovered from the insurance
company. The policies of the surviving partners will continue to survive but the surrender value of the policies of
the surviving partners would also be taken into account for the purpose of calculating the amount payable to the
legal representatives of the deceased partner. In other words the legal representatives would be entitled to
receive share in surrender value equivalent to the profit sharing ratio of the deceased.
Bank A/c Dr. (Assured value)
To Separate Life Policy of Deceased partner A/c
(Policy value received on death of a partner)
Separate Life Policy of Deceased Partner A/c Dr. (Assured value)
Separate Life Policy of Remaining Partners A/c Dr (Surrender value)
To Executor’s A/c (Total value distributed in profit sharing ratio)
To Remaining partners A/c (Total value distributed in profit sharing ratio)
(Being the total of assured value of deceased partner’s life policy and surrender value of other partners’ life
policy(s) distributed in the profit and loss sharing ratio)

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145 PARTNERSHIP ACCOUNTS 8.145

Example: Sona, Gabbu and Amit are partners sharing profits in the ratio of 3:1:1.
SONA GABBU AMIT
Policy 1,00,000 2,00,000 3,00,000
Surrender Value 10,000 20,000 30,000

If Amit dies, then, Amit's executives will get 3,00,000x1/5 and 1/5(10,000+20,000)=60,000+6,000= 66,000

5.6 SPECIAL TRANSACTIONS IN CASE OF DEATH:

PAYMENT OF DECEASED PARTNER’S SHARE
The basic distinction between retirement and death of a partner relates to finalisation of amount payable to the Executor
of the deceased partner. Although, revaluation of goodwill is done in the same way as it has been done in case of
retirement, in addition, the executor of the deceased partner is entitled to share of profit upto the date of death.
For example, A, B and C are in partnership sharing profits and losses at the ratio of 2:2:1. A died on 15th April,
2020. The firm closes its books of account as on 31st December every year. So the executor of A is entitled for
3½ months profit. If A’s share is immediately paid off then profit for 2020 can be taken as base for calculating 3½
months profits in the year, 2020. If M/s. A, B & C earned ` 96,000 in year 2019, then 3½ months profit is
` 28,000. A’s share comes to ` 28,000 × 2/5 i.e. ` 11,200.
Journal entry is:
Profit and Loss Suspense A/c * Dr. ` 11,200
To A’s Capital A/c ` 11,200
(Share of A 3½ months profit in 2020
is transferred to his Capital Account on death)
*At the end of the year 2020, the Profit & Loss Suspense A/c will be transferred to Profit and Loss A/c.

ILLUSTRATION 1

The following was the Balance Sheet of Om & Co. in which X, Y, Z were partners sharing profits and losses in
the ratio of 1:2:2 as on 31.3.2019. Mr. Z died on 31st December, 2019. His account has to be settled under the
following terms.
Balance Sheet of Om & Co. as on 31.3.2019
Liabilities ` ` Assets `
Trade payables 20,000 Building 1,20,000
Bank loan 50,000 Computers 80,000
General reserve 30,000 Inventories 20,000
Capital accounts: Trade receivables 20,000
X 40,000 Cash at bank 50,000
Y 80,000 Investments 10,000
Z 80,000 2,00,000
3,00,000 3,00,000

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8.146 PRINCIPLES AND PRACTICE OF ACCOUNTING

Goodwill is to be calculated at the rate of two years purchase on the basis of average of three years’ profits and
losses. The profits and losses for the three years were detailed as below:
Year ending on profit/loss
31.3.2019 30,000
31.3.2018 20,000
31.3.2017 (10,000) Loss

Profit for the period from 1.4.2019 to 31.12.2019 shall be ascertained proportionately on the basis of average
profits and losses of the preceding three years.
During the year ending on 31.3.2019 a car costing ` 40,000 was purchased on 1.4.2018 and debited to traveling
expenses account on which depreciation is to be calculated at 20% p.a. at written down value method. This
asset is to be brought into account at the depreciated value.
Other values of assets were agreed as follows:
Inventory at ` 16,000, building at ` 1,40,000, computers at ` 50,000; investments at ` 6,000. Trade receivables
were considered good.
Required:
(i) Calculate goodwill and Z’s share in the profits of the firm for the period 1.4.2019 to 31.12.2019.
(ii) Prepare revaluation account assuming that other items of assets and liabilities remained the same.
(iii) Prepare partners’ capital accounts and balance sheet of the firm Om & Co. as on 31.12.2019.

SOLUTION

(i) Calculation of goodwill and Z’s share of profit

(a) Adjusted profit for the year ended 31.3.2019: ` `
Profit (Given) 30,000
Add: Cost of car wrongly written off 40,000
Less: Depreciation for the year 2018-19 (20% on 40,000) (8,000) 32,000
62,000
(b) Average of last three year’s profits and losses Profit/(loss)
Year ended on `
31.3.2017 (10,000)
31.3.2018 20,000
31.3.2019 62,000
72,000
Average profit (72,000/3) 24,000
(c) Goodwill at 2 years’ purchase
` 24,000 x 2 = ` 48,000

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147 PARTNERSHIP ACCOUNTS 8.147

(d) Z’s share of profits from the period 1.4.2019 to 31.12.2019

` 24,000 x 9/12 x 2/5 = ` 7,200

(ii) Revaluation Account

` `
To Inventory account 4,000 By Building account 20,000
To Computers account 30,000 By Loss transferred to
To Investments account 4,000 X 4,560
To depreciation on car 4,800 Y 9,120
Z 9,120 22,800
42,800 42,800

Partners’ Capital Accounts

X Y Z X Y Z
` ` ` ` ` `
To Revaluation A/c 4,560 9,120 9,120 By Balance b/d 40,000 80,000 80,000
To Z’s Executor’s A/c 1,22,080 By General reserve 6,000 12,000 12,000
To Z 6,400 12,800 – By X and Y – – 19,200
To Balance c/d 41,440 82,880 By Car A/c 6,400 12,800 12,800
By Profit and Loss – – 7,200
suspense A/c
52,400 1,04,800 1,31,200 52,400 1,04,800 1,31,200

Balance Sheet of Om & Co. as on 31st December,2019

Liabilities ` Assets `
Trade payables 20,000 Building 1,40,000
Bank loan 50,000 Car 27,200
Capital accounts: Inventories 16,000
X 41,440 Computers 50,000
Y 82,880 Investments 6,000
Z’s Executor’s account 1,22,080 Trade receivables 20,000
Cash at bank 50,000
Profit and Loss suspense Account 7,200
3,16,400 3,16,400

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8.148 PRINCIPLES AND PRACTICE OF ACCOUNTING

Working Note:
Goodwill calculated at the time of death of partner Z ` 48,000
Partner Old Share New Share Gain Sacrifice
X 1 1 2 –
5 3 15
Y 2 2 4 –
5 3 15
Z 2 – – 2
5 5

Adjusting entry:
X’s Capital Account Dr. 6,400
Y’s Capital Account Dr. 12,800
To Z’s Capital Account 19,200
(Adjustment for goodwill on the death of Z on the basis of gaining ratio)

ILLUSTRATION 2

The partnership agreement of a firm consisting of three partners - A, B and C (who share profits in proportion of
½, ¼ and ¼ and whose fixed capitals are ` 10,000; ` 6,000 and ` 4,000 respectively) provides as follows:
(a) That partners be allowed interest at 10 per cent per annum on their fixed capitals, but no interest be
allowed on undrawn profits or charged on drawings.
(b) That upon the death of a partner, the goodwill of the firm be valued at two years’ purchase of the average
net profits (after charging interest on capital) for the three years to 31st December preceding the death
of a partner.
(c) That an insurance policy of ` 10,000 each to be taken in individual names of each partner, the premium
is to be charged against the profit of the firm.
(d) Upon the death of a partner, he is to be credited with his share of the profits, interest on capitals etc.
calculated upon 31st December following his death.
(e) That the share of the partnership policy and goodwill be credited to the deceased partner as on
31st December following his death.
(f) That the partnership books be closed annually on 31st December.
A died on 30th September 2019, the amount standing to the credit of his current account on 31st December,
2018 was ` 450 and from that date to the date of death he had withdrawn ` 3,000 from the business.
An unrecorded liability of ` 2,000 was discovered on 30th September, 2019. It was decided to record it and be
immediately paid off.
The trading result of the firm (before charging interest on capital) had been as follows: 2016 Profit ` 9,640; 2017
Profit ` 6,720; 2018 Loss ` 640; 2019 Profit ` 3,670.

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149 PARTNERSHIP ACCOUNTS 8.149

Assuming the surrender value of the policy to be 20 percent of the sum assured.
Required
Prepare an account showing the amount due to A’s legal representative as on 31st December, 2019.

SOLUTION

A’s Capital Account

2019 ` 2019 `
Sep. 30 To Current A/c 2,550 Jan. 1 By Balance b/d 10,000
(3,000 - 450) Dec. 31 By Profit and Loss A/c :
Dec. 31 To Profit and Loss Adjt. 1,000 Interest on Capital 1,000
(Unrecorded Liability) Share of Profit 835
To Balance Transferred to B & C (Goodwill) 3,240
A’s Executor’s A/c 18,525 Insurance Policies A/c 7,000
22,075 22,075
Working Notes:
(i) Valuation of Goodwill
Year Profit before Interest Interest Profit after
on fixed capital interest
` ` `
2016 9,640 2,000 7,640
2017 6,720 2,000 4,720
2018 (-) 640 2,000 (-) 2,640
15,720 6,000 9,720
`
Average 3,240
Goodwill at two years purchase of average net profits 6,480
Share of A in the goodwill 3,240
(ii) Profit on Separate Life Policy
A’s policy 10,000
B and C’s policy @ 20% 4,000
14,000
Share of A (1/2) 7,000
(iii) Share in profit for 2019
Profit for the year 3,670
Less : Interest on capitals (2,000)
1,670
A’s share in profit (1/2) 835

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8.150 PRINCIPLES AND PRACTICE OF ACCOUNTING

(iv) As unrecorded liability of ` 2,000 has been charged to Capital Accounts through Profit and Loss
Adjustment Account, no further adjustment in current year’s profit is required.
(v) Profits for 2016, 2017 and 2018 have not been adjusted (for valuing goodwill) for unrecorded liability for
want of precise information.

ILLUSTRATION 3

The following is the Balance Sheet of M/s. ABC Bros as at 31st December, 2019.
Balance Sheet as at 31st December, 2019
Liabilities ` Assets `
Capital Machinery 5,000
A 4,100 Furniture 2,800
B 4,100 Fixture 2,100
C 4,500 Cash 1,500
General Reserve 1,500 Inventories 950
Trade payables 2,350 Trade receivables 4,500
Less: Provision for Doubtful debts 300 4,200
16,550 16,550

C died on 3rd January, 2020 and the following agreement was to be put into effect.
(a) Assets were to be revalued: Machinery to ` 5,850; Furniture to ` 2,300; Inventory to ` 750.
(b) Goodwill was valued at ` 3,000 and was to be credited with his share, without using a Goodwill Account
(c) ` 1,000 was to be paid away to the executors of the dead partner on 5th January, 2020.
Required to show:
(i) The Journal Entry for Goodwill adjustment.
(ii) The Revaluation Account and Capital Accounts of the partners.
(iii) Which account would be debited and which account credited if the provision for doubtful debts in the
Balance Sheet was to be found unnecessary to maintain at the death of C.

SOLUTION

(i) Journal Entry in the books of the firm

Date Particulars ` `
Jan 3, A’s Capital A/c Dr. 500
2020 B’s Capital A/c Dr. 500
To C’s Capital A/c 1,000
(Being the required adjustment for goodwill through the
partner’s capital accounts)

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151 PARTNERSHIP ACCOUNTS 8.151

(ii) Revaluation Account

Particulars ` Particulars `
To Furniture A/c (` 2,800 – 2,300) 500 By Machinery A/c (` 5,850 – 5,000) 850
To Inventory A/c (` 950 – 750) 200
To Partners’ Capital A/cs 150
(A – ` 50, B – ` 50, C – ` 50)
850 850

Partners’ Capital Accounts

Particulars A B C Particulars A B C
` ` ` ` ` `
To C (Goodwill) 500 500 – By Balance b/d 4,100 4,100 4,500
To Cash A/c – – 1,000 By General Reserve A/c 500 500 500
To Executors A/c – – 5,050 By Revaluation A/c (Profit) 50 50 50
To Balance C/d 4,150 4,150 – By A (Goodwill) – – 500
By B (Goodwill) – – 500
4,650 4,650 6,050 4,650 4,650 6,050

(iii) Provision for Doubtful Debts Account is a credit balance. To close, this account is to be debited. It
becomes a gain for the partners. Therefore, either Partners’ Capital Accounts (including C) or
Revaluation Account is to be credited.
Working Note:
Statement showing the Required Adjustment for Goodwill
Particulars A B C
Right of goodwill before death 1/3 1/3 1/3
Right of goodwill after death 1/2 1/2 –
Gain/(Sacrifice) (+) 1/6 (+) 1/6 (-) 1/3

Profit sharing ratio is equal before or after the death of C because nothing has been mentioned in respect of
profit-sharing ratio.

ILLUSTRATION 4

B and N were partners. The partnership deed provides inter alia:

(i) That the accounts be balanced on 31st December each year.
(ii) That the profits be divided as follows:
B: One-half; N: One-third; and carried to Reserve Account: One-sixth
(iii) That in the event of death of a partner, his executor will be entitled to the following:

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8.152 PRINCIPLES AND PRACTICE OF ACCOUNTING

(a) the capital to his credit at the date of death; (b) his proportion of profit to date of death based
on the average profits of the last three completed years; (c) his share of goodwill based on three
years’ purchases of the average profits for the three preceding completed years.
Trial Balance on 31st December, 2019
Particulars Dr. (`) Cr. (`)
B’s Capital 90,000
N’s Capital 60,000
Reserve 30,000
Bills receivable 50,000
Investments 40,000
Cash 1,10,000
Trade payables 20,000
Total 2,00,000 2,00,000

The profits for the three years were 2017: ` 42,000; 2018: ` 39,000 and 2019: ` 45,000. N died on
1st May, 2020. Show the calculation of N (i) Share of Profits; (ii) Share of Goodwill; (iii) Draw up N’s Executors
Account as would appear in the firms’ ledger transferring the amount to the Loan Account.

SOLUTION

(i) Ascertainment of N’s Share of Profit (ii) Ascertainment of Value of Goodwill

2017 42,000 2017 42,000
2018 39,000 2018 39,000
2019 45,000 2019 45,000
Total Profit 1,26,000 Total Profit for 3 years 1,26,000
Average Profit 42,000 Average Profit 42,000
4 months’ Profit 14,000 Goodwill - 3 years
Purchase of Average Profit 1,26,000
N’s Share in Profit
(2/5th* of ` 14,000) 5,600 N’s Share of goodwill
(2/5 of ` 1,26,000) 50,400

* Profit sharing ratio between B and N = 1/2; 1/3; = 3: 2, Therefore N’s share of Profit = 2/5
N’s Executors Account
Date Particulars ` Date Particulars `
2020 2020
May 1, To N’s Loan A/c 1,28,000 Jan. 1 By Capital A/c 60,000
May 1 By Reserves

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153 PARTNERSHIP ACCOUNTS 8.153

(2/5th of ` 30,000) 12,000

May 1 By B’s Capital A/c
(Share of goodwill) 50,400
May 1 By P/L Suspense A/c
(Share of Profit) 5,600
1,28,000 1,28,000

ILLUSTRATION 5

Diya, Riya & Kiya are partners of M/s. DRK Fabrics sharing profits and losses in the ratio of 2:1:2. On
31st March 2020 their Balance Sheet was as under:
Liabilities ` Assets `
Capitals : Land & Building 1,65,000
Diya 1,50,000 Furniture 75,000
Riya 1,80,000 Joint life Policy 60,000
Kiya 70,000 Inventory 88,740
General Reserve 1,40,000 Trade Receivable 96,750
Trade payables 60,000 Bank 1,14,510
6,00,000 6,00,000

Kiya died on 30th September, 2020.

The partnership deed provides as follows:
(a) That partners be allowed interest at 12% p.a. on their capitals, but no interest be charged on drawings.
(b) Upon the death of a partner, the goodwill of the firm be valued at one years’ purchase of the average
net profits (after charging interest on capital) for the four years to 31st March preceding the death of a
partner. The profits of the firm before charging interest on capitals were
2016-17 1,62,000
2017-18 1,99,000
2018-19 1,87,000
2019-20 1,96,000
Average capital during preceding four years may be assumed as ` 3,00,000
(c) Profits till the date of death to be ascertained on the basis of average profit of previous four years
(d) Upon the death of a partner, she is to be credited with her share of the profits, interest on capitals etc.
calculated till the date of death

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8.154 PRINCIPLES AND PRACTICE OF ACCOUNTING

After the death of Kiya

1. ` 2,00,000 was received from insurance company against Joint life Policy.
2. Land & Building was appreciated by 20%, Furniture to be depreciated by 10%, inventory to be revalued
at ` 80,000. Bad debts amounted ` 1760.
3. Amount payable to Kiya was paid in cash.
You are required to prepare
1. Revaluation A/c
2. Partners’ Capital A/c
3. Balance Sheet as on 30th September 2020, assuming other Assets and liabilities remaining the same.

SOLUTION

Revaluation A/c
Particulars ` Particulars `
To Furniture 7,500 By Land & Building 33,000
To Inventory 8,740
To Bad Debts 1,760
To Profit on Revaluation
Diya 6,000
Riya 3,000
Kiya 6,000 15,000
33,000 33,000

Partners Capital A/c

Particulars Diya Riya Kiya Particulars Diya Riya Kiya
` ` ` ` ` `
To Kiya capital 40,000 20,000 By Balance b/d 1,50,000 1,80,000 70,000
To Bank 2,79,800 By General Reserve 56,000 28,000 56,000
To Balance c/d 2,28,000 2,19,000 By Joint life Policy 56,000 28,000 56,000
By Interest on Capital 4,200
By revaluation 6,000 3,000 6,000
By Diya & Riya capital 60,000
By Profit & loss suspense 27,600
A/c

2,68,000 2,39,000 2,79,800 2,68,000 2,39,000 2,79,800

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155 PARTNERSHIP ACCOUNTS 8.155

Bank A/c
Particulars ` Particulars `
To Balance B/d 1,14,510 By Kiya’s Capital 2,79,800
To Bank 2,00,000 By Balance c/d 34,710

3,14,510 3,14,510
Balance Sheet as on 30th September, 2020
Liabilities ` Assets `
Capitals : Land & Building 1,98,000
Diya 2,28,000 Furniture 67,500
Riya 2,19,000 Inventory 80,000
Trade Receivable 94,990
Trade payables 60,000 Bank 34,710
Profit and loss Suspense (27,600+4,200) 31,800
5,07,000 5,07,000

Working Notes:
1. Goodwill valuation
2016-17 1,62,000
2017-18 1,99,000
2018-19 1,87,000
2019-20 1,96,000
Total 7,44,000
Average = 7,44,000/4 = 1,86,000
Less: Interest on Capital 3,00,000 X 12% = 36,000
Adjusted Average Profit =1,50,000
Goodwill (1 year’s purchase) = 1,50,000
Kiya’s share (2/5) = 60,000
2. Journal entry for adjustment of goodwill
Particulars ` `
Diya’s Capital A/c Dr. 40,000
Riya’s Capital A/c Dr. 20,000
To Kiya’s Capital A/c 60,000
(Share of goodwill adjusted)

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8.156 PRINCIPLES AND PRACTICE OF ACCOUNTING

3. Kiya’s share of profit till the date of death

Average profit for full year before interest on capital = 1,86,000
6 month’s profit = 93,000
Less: interest on capital 4,00,000 X 12% X 6/12 = 24,000
Adjusted profit till the date of death = 69,000
Kiya’s share 2/5th = 27,600
4. The Joint life policy in this question is based on the surrender value method- where in the amount shown
in the balance sheet shall be deducted from the JLP proceeds received from insurance co, on the death
of a partner.-
` 2,00,000- 60,000 (Balance Sheet value) = ` 1,40,000- divided in profit sharing ratio between the
partners.

SUMMARY
♦ The problems arising on the death of a partner are similar to those arising on retirement. Assets and
liabilities have to be revalued and the resultant profit or loss has to be transferred to the Capital Accounts
of all partners including the deceased partner. Goodwill is dealt with exactly in the way already discussed
in the case of retirement.
♦ Treatment of joint life policy will also be same as in the case of retirement. However, in case of death of
a partner, the firm would get the joint policy value. The only additional point is that as death may occur
on any day, the representatives of the deceased partner will be entitled to the partner’s share of profit
from the beginning of the year to the date of death. After ascertaining the amount due to the deceased
partner, it should be credited to his Executor’s Account.
♦ If the death takes place during the accounting period, the Executor of the deceased partner is entitled
to have a share of profit upto the date of death based on the profit earned in the immediately preceding
year or some other agreed basis. For this purpose, the deceased partners' Capital Accounts is credited
and Profit & Loss Suspense Account is debited.

TEST YOUR KNOWLEDGE

True and False
1. Business of partnership comes to an end on death of a partner.
2. Legal heir of a deceased partner automatically becomes partner in the firm.
3. A revaluation account is opened in the books of accounts on death of a partner.
4. Any reserve appearing in the balance sheet on the date of death of a partner is transferred to all partners
capital account in their profit sharing ratio.
5. Legal heirs of a deceased partner are entitled to his capital account balance only.
6. It is not necessary to adjust goodwill on death of a partner.

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157 PARTNERSHIP ACCOUNTS 8.157

7. On death of a partner continuing partners can agree to change their capital contribution and profit sharing
ratio.
8. On death of a partner, the firm gets surrender value of the joint life policy.
9. Only legal heirs of deceased partner are entitled to amount received from joint life policy.

Multiple Choice Questions

1 In the absence of proper agreement, representative of the deceased partner is entitled to the Dead
partner’s share in
(a) Profits till date, goodwill, joint life policy, share in revalued assets and liabilities.
(b) Capital, goodwill, joint life policy, interest on capital, share in revalued assets and liabilities.
(c) Capital, profits till date, goodwill, joint life policy, share in revalued assets and liabilities.
2 A, B and C are the partners sharing profits and losses in the ratio 2:1:1. Firm has a joint life policy of
` 1,20,000 and in the balance sheet it is appearing at the surrender value i.e. ` 20,000. On the death
of A, how this JLP will be shared among the partners.
(a) ` 50,000: ` 25,000: ` 25,000.
(b) ` 60,000: ` 30,000: ` 30,000.
(c) ` 40,000: ` 35,000: ` 25,000.
3 R, J and D are the partners sharing profits in the ratio 7:5:4. D died on 30th June 2020. It was decided
to value the goodwill on the basis of three year’s purchase of last five years average profits. If the profits
are ` 29,600; ` 28,700; ` 28,900; ` 24,000 and ` 26,800. What will be D’s share of goodwill?
(a) ` 20,700. (b) ` 27,600. (c) ` 82,800.
4 R, J and D are the partners sharing profits in the ratio 7:5:4. D died on 30th June 2020 and profits for
the accounting year 2019-2020 were ` 24,000. How much share in profits for the period 1st April 2020
to 30th June 2020 will be credited to D’s Account.
(a) ` 6,000. (b) ` 1,500. (c) ` 2,000.
5. Revaluation account is prepared at the time of
(a) Admission and retirement of a partner (b) Death of a partner
(c) All of the above
6. If three partners A, B & C are sharing profits as 5:3:2, then on the death of a partner A, how much B &
C will pay to A’s executer on account of goodwill. Goodwill is to be calculated on the basis of 2 years
purchase of last 3 years average profits. Profits for last three years are: ` 3,29,000; ` 3,46,000 and `
4,05,000.
(a) ` 2,16,000 & ` 1,42,000. (b) ` 2,44,000 & ` 2,16,000.
(c) ` 2,16,000 & ` 1,44,000.

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8.158 PRINCIPLES AND PRACTICE OF ACCOUNTING

Theory Questions
1. Explain distinction between retirement and death of a partner as relating to finalisation of amount
payable.
2. What amount is payable to legal representatives of dead partner?

Practical Questions
1. The Balance Sheet of Seed, Plant and Flower as at 31st December, 2019 was as under :
Liabilities ` Assets `
Trade payables 20,000 Fixed Assets 40,000
General Reserve 5,000 Debtors 10,000
Capital: Bills Receivable 4,000
Seed 25,000 Inventories 16,000
Plant 15,000 Cash at Bank 10,000
Flower 15,000 55,000
80,000 80,000

The profit sharing ratio was: Seed 5/10, Plant 3/10 and Flower 2/10. On 1st May, 2020 Plant died. It was
agreed that:
(a) Goodwill should be valued at 3 years purchase of the average profits for 4 years. The profits
were:
2016 ` 10,000 2018 ` 12,000
2017 ` 13,000 2019 ` 15,000
(b) The deceased partner to be given share of profits upto the date of death on the basis of the
previous year.
(c) Fixed Assets were to be depreciated by 10%. A bill for ` 1,000 was found to be worthless.
These are not to affect goodwill.
(d) A sum of ` 7,750 was to be paid immediately, the balance was to remain as a loan with the firm
at 9% p.a. as interest.
Seed and Flower agreed to share profits and losses in future in the ratio of 3: 2.
Give necessary journal entries.
2. Peter, Paul and Prince were partners sharing profits and losses in the ratio 2:1:1. It was provided in the
partnership deed that in the event of retirement /death of a partner he/his legal representatives would
be paid:
(i) The balance in the capital Account
(ii) His share of goodwill of the firm valued at two years purchase of normal average profits (after
charging interest on fixed capital) for the last three years to 31st December preceding the
retirement or death.

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159 PARTNERSHIP ACCOUNTS 8.159

(iii) His share of profits from the beginning of the accounting year to the date of retirement or death,
which shall be taken on proportionate basis of profits of the previous year as increased by 25%
(iv) Interest on fixed capital at 10% p.a. though payable to the partners will not be payable in the
year of death or retirement.
(v) All the asset are to be revalued on the date of retirement or death and the profit and loss be
debited/credited to the Capital Accounts in the profit sharing ratio.
Peter died on 30th September, 2019. The books of Account are closed on calendar year basis from
1st January to 31st December.
The balance in the Fixed Capital Accounts as on 1st January, 2019 were Peter ` 10,000, Paul ` 5,000
and Prince ` 5,000. The balance in the Current Account as on 1st January, 2019 were Peter ` 20,000,
Paul ` 10,000 and Prince ` 7,000. Drawings of Peter till 30th September, 2019 were ` 10,000. The
profits of the firm before charging interest on capital for the calendar years 2016, 2017 and 2018 were
` 1,00,000, ` 1,20,000 and ` 1,50,000 respectively. The profits include the following abnormal items of
credit:
2016 2017 2018
` ` `
Profit on sale of assets 5,000 7,000 10,000
Insurance claim received 3,000 - 12,000
The firm has taken out a Joint Life Policy for ` 1,00,000. Besides the partners had severally insured their
lives for ` 50,000 each, the premium in respect thereof being charged to the Profit and Loss account.
The surrender value of the Policies were 30% of the face value. On 30th June, 2019 the firm received
notice from the insurance company that the insurance premium in respect of fire policy had been
undercharged to the extent of ` 6,000 in the year 2018 and the firm has to pay immediately. The
revaluation of the assets indicates an upward revision in value of assets to the extent of ` 20,000.
Prepare an account showing the amount due to Peter’s Legal representatives as on 30th September,
2019 along with necessary workings.

ANSWERS/HINTS
True and False
1. False: Surviving partners continue to carry on the business.
2. False: Legal heirs of deceased partners are entitled to dues of the deceased partner.
3. True: To find out the actual values of the assets and liabilities, revaluation account is prepared.
4. True: reserves belong to the partners in the same manner the capital contributed by them. Hence it is
distributed to them through the capital account.
5. False: Legal heirs of a deceased partner are entitled to all the dues of deceased partner.
6. False: It is very much necessary to adjust goodwill on death of a partner.
7. True: Yes, it can be continued in the earlier share or in new share- in either case it leads to computing
a new profit sharing ratio

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8.160 PRINCIPLES AND PRACTICE OF ACCOUNTING

8. False: On death of a partner the firm gets full value of sum assured of the joint life policy.
9. False: All the partners are entitled to amount received from joint life policy.

Multiple Choice Questions

1. (c), 2. (a), 3. (a), 4. (b), 5. (c), 6. (c)

Theoretical Questions
1. The basic distinction between retirement and death of a partner relates to finalisation of amount payable
to the Executor of the deceased partner. Although, revaluation of goodwill is done in the same way as it
has been done in case of retirement, in addition, the executor of the deceased partner is entitled to share
of profit upto the date of death
2. When the partner dies the amount payable to him/her is paid to his/her legal representatives. The
representatives are entitled to the followings :
(a) The amount standing to the credit to the capital account of the deceased partner;
(b) Interest on capital, if provided in the partnership deed upto the date of death;
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities;
(f) Share of profit upto the date of death;
(g) Share of Joint Life Policy.

Practical Questions
Answer 1 Journal Entries
2020 ` `
May 1 General Reserve Account Dr. 5,000
To Seed’s Capital Account 2,500
To Plant’s Capital Account 1,500
To Flower’s Capital Account 1,000
(General Reserve transferred to Capital Account on the death of Plant)
Seed’s Capital Account Dr. 3,750
Flower’s Capital Account Dr. 7,500
To Plant’s Capital Account 11,250
(Adjustment for goodwill on the death of Plant on the basis of gaining
ratio) (Value = 3 × (10,000 + 13,000 + 12,000 + 15,000)/4)
Revaluation Account Dr. 5,000
To Fixed Assets Account 4,000

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161 PARTNERSHIP ACCOUNTS 8.161

To Bills Receivable Account 1,000

(Depreciation of fixed assets @ 10% and writing off of one bill for
`1,000 on Plant’s death)
Seed’s Capital Account Dr. 2,500
Plant’s Capital Account Dr. 1,500
Flower’s Capital Account Dr. 1,000
To Revaluation Account 5,000
(Loss on Revaluation transferred to capital accounts)
Profit and Loss Suspense Account Dr. 1,500
To Plant’s Capital Account 1,500
(Plant’s share of four month’s profit based on the previous year)
Plant’s Capital Account Dr. 27,750
To Plant’s Executor’s Account 27,750
(Amount standing to the credit of Plant’s Capital Account transferred
to the credit of his Executor’s Account)
Plant’s Executor’s Account Dr. 7,750
To Bank Account 7,750
(Amount paid to Plant’s Executors)

Answer 2 In the books of M/s Paul and Prince

Executors of Peter Account

` `
To Balance c/d 2,91,125 By Peter’s capital A/c (W.N.6) 20,000
By Peter’s Current A/c (W.N.7) 2,71,125
2,91,125 2,91,125

Working Notes:
2016 2017 2018
` ` `
1. Valuation of Goodwill:
Profit as per Profit and loss A/c 1,00,000 1,20,000 1,50,000
Less: Interest on capital @ 10% 2,000 2,000 2,000
Abnormal Items:
Profit on sale of asset 5,000 7,000 10,000
Insurance claim received 3,000 - 12,000

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8.162 PRINCIPLES AND PRACTICE OF ACCOUNTING

Insurance premium undercharged - - 6,000

90,000 1,11,000 1,20,000
Total profit of three years 3,21,000
Average profit 1,07,000
Goodwill (2 x Average profit) 2,14,000
Peter’s share of goodwill (2/4) 1,07,000

2. Peter’s share of profit: `

Profit for the year 2018 1,50,000
Less: Insurance premium undercharged 6,000
1,44,000
Add: 25% increase thereof 36,000
Estimated profit for 2019 1,80,000
Less: Interest on capital * 1,000
Estimated profit for 2019 1,79,000
Estimated profit upto 30.9.19 1,34,250
Peter’s Share (2/4) 67,125
*Since Peter was not entitled to interest on capital in the year of death, interest is payable only to the
remaining two partners.
3. Profit on revaluation of assets:
`
Upward revision in the value of assets 20,000
Peter’s share (2/4) 10,000

4. Peter’s share in insurance premium undercharged:

Insurance premium undercharged in 2018 6,000
Peter’s share 3,000
5. Share of life policy:
Joint life policy 1,00,000
Maturity value of Peter’s individual life policy 50,000
Surrender value of individual life policies of Paul & Prince
(30 % of face value) 30,000
1,80,000
Peter’s share (2/4) 90,000

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163 PARTNERSHIP ACCOUNTS 8.163

6. Peter’s Capital Account

` `
30.9.19 To Executors of Peter A/c 20,000 1.1.19 By Balance b/d 10,000
(Transfer) 30.9.19 By Profit on revaluation of 10,000*
assets
20,000 20,000
* This is generally transferred to Peter’s current account. But as per the requirement of adjustment No.
(v) of question, it is transferred to capital account.
7. Peter’s Current Account
` `
30.9.19 To Drawings 10,000 1.1.19 By Balance b/d 20,000
To Insurance premium 3,000 30.9.19 By Share of goodwill 1,07,000
undercharged By share of profit 67,125
To Executor’s of Peter’s 2,71,125 By Share of life policy 90,000
Account
(balance transferred)
2,84,125 2,84,125

Note: The share of goodwill given to peter would be borne by remaining partners in their gaining ratio,
so that goodwill account does not appear in the balance sheet.

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