Accounting Treatment of Partner’s Capital Account in case of Death of a Partner (Fixed Capital)
Capital is the amount contributed by the partners in the firm. Partner’s capital shows equity in a partnership that is owned by specific partners. It records the initial and subsequent contribution made by each partner and also the withdrawal made by the partner. Partner’s Capital Account shows the ownership interest in the firm by each partner of the firm. Partner’s Capital Account can either be fixed or fluctuating. It records all the transactions related to the partnership firm and the partners. All the initials transaction and share profit or loss made by the firm, and also the gains or revenue and loss incurred by the firm are recorded in the share of each partner in their capital account.
Methods of Maintaining Capital Account
Fixed Capital Method:
Fixed Capital means that the capital of the partners is affixed and stationery. The capital of the partners does not change with every transaction and remains the same. It changes only when there is additional capital introduced, or drawings are made(withdrawal of capital) by the partner. Two separate accounts are maintained- Partner’s Capital Account and Partner’s Current Account. Partner’s Capital Account is credited with capital contributed and additional capital introduced and debited with withdrawal made by the partner. Partner’s Current Account is debited or credited by the transaction with the firm other than the one directly relating to Capital Account.
Fluctuating Capital Method:
Fluctuating Capital means that the capitals of the partners fluctuate and are irregular. Capitals of the partners change with every transaction and do not remain the same. Only one capital account is maintained under fluctuating capital method. All the transactions of the partners are recorded under one head separately in the name of each partner, i.e., Partner’s Capital Account. The account is debited or credited by the transactions with the firm relating to the partner.
Meaning of Fixed Capital Method
Fixed Partner’s Capital Accounts Method is the method of maintaining capital accounts of a firm under which the amount of capital of each partner is fixed and only changes in case of a permanent increase or permanent decrease in the capital. There is an increase in the capital when additional capital is introduced into the firm by the partner and a permanent decrease in the capital when the concerned partner withdraws from his capital. Under this method, two accounts are maintained:
1. Partner’s Capital Account
2. Partner’s Current Account
- Capital Account: The Capital Account records only those transactions that are related to capital or change in the capital (Additional Capital and Drawings). In the capital account, the capital brought in by the partner is credited, and any drawing is debited.
- Current Account: A separate account known as a Current Account or Drawings Account is opened to record all the other transactions related to partners, such as Interest on capital, Interest on drawings, salary, Profit/loss share, etc. Any income or profit of the partner is credited, and any expense or loss is debited to the current account.
Steps of Fixed Capital Method:
Step 1: A Capital Account is prepared, and the initial capital invested by the deceased partner is credited, and any additional investments made by the partner is also credited.
Step 2: If the capital accounts are maintained on the basis of fixed capital method, at the time of death of the partner, the current account of the partner is transferred to the capital account.
Step 3: All the Income and Profits of the deceased partner, such as Interest on capital, the salary of the partner, the profit share of the partner, commission, etc., are recorded on the credit side of the Capital Account.
Step 4: Any drawings from the capital are recorded on the debit side of the capital account, and also Interest on drawings is debited to the Capital Account.
Step 5: Revaluation profit and the accumulated reserves and undistributed profit on the date of death of the deceased partners are credited in the profit sharing ratio.
Step 6: Revaluation loss and the accumulated losses are debited to the partner’s capital account in their profit-sharing ratio.
Step 7: The share of goodwill of the deceased partner is credited to the partner’s capital account in the gaining ratio of the remaining partner.
Step 8: At last, the closing capital of the partner is calculated by subtracting the debit side of the Capital Account from the credit side. The closing balance of the deceased partner is then paid by transferring it to his Executor A/c.
Format of Fixed Capital Method:
G, H, and K were partners in the firm sharing profit, and loss in the ratio of 3:2:1. The Balance Sheet of the firm on 31st March 2022 was as follows:
H died on 30th September,2022. The remaining partners decided on the following terms:
1. Land and Building will be appreciated by 25%, and Furniture will be depreciated by 10%.
2. All the debtors were good.
3. An Outstanding expense of ₹600 is to be recorded. Advertising Expense of ₹1,800 has to be carried forward to the next accounting year and, therefore, to be adjusted through the revaluation account.
4. Goodwill of the firm to be valued on 2 years purchase of last 3 years average profit.
5. Accrued interest (income) of ₹2,400 are to be brought into books of accounts.
6. Profit from 1st April 2021 till the date of death of the partner was ₹7,200.
7. Interest on capital to be provided @12% and @6% to be charged on drawings.
7. Remaining Partner’s decided to share the future profit-sharing ratio equally.
8. Amount to be paid to the deceased partner’s executor is paid 25% immediately, and the rest amount is transferred to the executor’s loan account.
Profit for 2019-20 was ₹18,200 2020-21 was ₹4,200(loss), and for 2021-22 was ₹22,000. H’s Drawing up to the date of death amounted to ₹ 12,600. Prepare the Revaluation account, Partner’s Capital account, and his executor account on the date of death of the partner.
1. Calculation of Gaining Ratio:
2. Calculation of H’s share in Goodwill:
Average Profit of last three years =
Goodwill = Average profit X 2 years purchase
= ₹12,000 x 2
Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm
H’s Share of Goodwill =
3. Calculation of the deceased partner’s share in profit till the date of death:
Profit on the date of death of partner =₹7,200
Share in profit =
H’s share in profit =₹2,400
Notes: In the absence of the actual date of drawings, interest is calculated on an average of 3 months on the assumption that the drawings were made evenly during the period of 6 months.
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