Death of a Partner

 

The death of a partner in a partnership firm is a significant event that affects the accounting and financial aspects of the business. It necessitates the settlement of the deceased partner's account, adjustment of partnership rights among the remaining partners, and calculation of the deceased partner's share in the profit, losses, and assets of the firm up to the date of death. Here are detailed notes covering the key aspects of the death of a partner, tailored for Class XII Commerce students.

1. Introduction

In a partnership firm, partners share profits and losses as per the agreement. The death of a partner dissolves the existing partnership agreement, leading to reconstitution of the firm. The accounts need to be settled to determine the amount due to the deceased partner's estate, which includes his/her share of profit/loss, capital, and any other dues as per the partnership deed.

2. Steps in Settlement of Accounts Upon Death of a Partner

a. Ascertainment of the Deceased Partner's Share in Profits up to the Date of Death

• Time of Death: Profits are to be calculated up to the date of the partner's death.
• Basis of Profit Sharing: The profit share is calculated based on the agreement or, in its absence, equally among partners.
• Calculation of Profits: Profits can be estimated based on the previous year's profits or an average of profits over a few years if the current year's profit is not ascertainable.

b. Adjustment of Capital Accounts

• The deceased partner’s capital account is adjusted for his/her share of profit/loss, drawings, and interest on capital, if any.

c. Treatment of Goodwill

• The deceased partner's share of goodwill is calculated and credited to his/her capital account. Goodwill is the value of the reputation of the business, capable of earning profits in the future.

d. Revaluation of Assets and Liabilities

• Assets and liabilities are revalued to reflect their fair market value, and the resulting profit or loss is adjusted in the capital accounts of all partners, including the deceased.

e. Settlement of the Amount Due to the Deceased Partner’s Estate

• The amount due is paid to the legal representative of the deceased partner or transferred to his/her executor’s account.

3. Key Accounts Involved

a. Revaluation Account

• Used to record increases or decreases in the value of assets and liabilities.

b. Capital Accounts

• Adjusted to reflect the share of revaluation profit or loss, goodwill, and the deceased partner’s final claim.

c. Executor’s Account

• An account in the name of the executor or representative of the deceased partner, showing the amount payable to the deceased partner’s estate.

4. Accounting Entries

Several accounting entries are made to reflect the above adjustments, including:

• For revaluation profits or losses.
• For recording the deceased partner’s share of profit up to the date of death.
• For adjustment of goodwill.
• For settling the amount due to the deceased partner’s estate.

5. Legal Aspects

The Indian Partnership Act, 1932, governs the dissolution of partnership due to the death of a partner. It mandates the settlement of accounts and payment of the deceased partner's share to his/her legal representative.

Conclusion

The death of a partner is a critical event that necessitates careful handling of the partnership accounts to ensure fair settlement to the deceased partner's estate and reconstitution of the firm. Commerce students must understand the procedural and accounting aspects of this process, including the calculation of the deceased partner’s share, adjustment of accounts, and legal considerations, to grasp the financial implications and responsibilities of the remaining partners in such situations.