Reconstitution of Partnership : Death of a Partner

Gaining partners' Capital Accounts in gaining ratio

Step 1: When a partner dies, the continuing (surviving) partners gain the share of the deceased partner. Step 2: Since they gain the share, they must compensate the deceased partner's estate for the goodwill. Step 3: The gaining partners' Capital Accounts are debited in the gaining ratio. Step 4: The deceased partner's Capital Account is credited with his share of goodwill. Step 5: This ensures that the deceased partner's heirs receive fair compensation for the goodwill.

Deceased Partner's Capital A/c Dr. To Deceased Partner's Executor's Loan A/c

Step 1: After all adjustments are made in the deceased partner's Capital Account, a final balance (amount due) is determined. Step 2: This amount is transferred to the Deceased Partner's Executor's Loan Account. Step 3: The journal entry is: Deceased Partner's Capital A/c Dr. / To Deceased Partner's Executor's Loan A/c. Step 4: This closes the Capital Account of the deceased partner. Step 5: The Executor's Loan Account then shows the liability of the firm towards the executor.

6% per annum

Step 1: After the death of a partner, the amount due to the executor may not be paid immediately. Step 2: As per Section 37 of the Indian Partnership Act, 1932, if there is no agreement, the executor has two options. Step 3: Option 1: Receive interest at 6% per annum on the unpaid amount. Step 4: Option 2: Receive a proportionate share of the profits earned using the executor's capital. Step 5: The executor chooses whichever option is more beneficial. The default interest rate is 6% p.a.

₹1,500

Step 1: Use the turnover basis formula: Deceased Partner's Share = (Last Year's Profit / Last Year's Sales) × Sales till Date of Death × Share of Deceased Partner. Step 2: Profit ratio per rupee of sales = ₹20,000 / ₹1,20,000. Step 3: Firm's profit on sales of ₹30,000 = (20,000/1,20,000) × 30,000 = ₹5,000. Step 4: Y's share = 3/10 of the profit sharing ratio (total 4+3+3=10). Step 5: Y's share = ₹5,000 × 3/10 = ₹1,500.