Reconstitution of a Partnership Firm in case of Death of a Partner

On the death of a partner, the partnership comes to end. The death of a partner does not mean the firm comes to an end as the partnership firm is a separate entity from the partners. After the death of a partner, the firm continues its operation, and the remaining partner acquires a share of the deceased partner. On the death of a partner, the amount due to him/her is calculated in his capital account maintained in the books of accounts of the firm. The due amount is paid to the legal representative of the deceased partner. 

The Legal Representative of the Deceased partner is entitled to get:

1. The credit amount in the Deceased partner’s capital account.

2. Deceased partner’s share in the value of Goodwill of the firm.

3. Share in profit earned by the firm from the start of the accounting year till the date of death of the partner.

4. Deceased partner’s share in profit earned on revaluation of assets and reassessment of liabilities.

5. Deceased partner’s share in undistributed profit and reserves.

6. Deceased partner’s salary, if given.

7. If the Partnership deed mentions interest on the Deceased partner’s capital.

On the death of the partner, the following amount will be debited to his capital account to conclude the amount due to the deceased partner being paid to his legal executor:

1. Deceased partner’s share in the loss incurred on revaluation of assets and reassessment of liabilities.

2. Deceased partner’s drawings made.

3.  If the Partnership deed mentions interest on the Deceased partner’s drawings.

4. Share of a deceased partner in the loss which may have occurred from the start of the accounting year till the date of death of the partner.

Journal Entries:

A. Adjustment regard to Goodwill:

i. When Goodwill Account appears in the books:

When goodwill already appears in the books (i.e., in the asset side of the Balance Sheet) at the time of the partner’s death, it is written off among all the partners in the old profit-sharing ratio. The following journal entry is passed:

ii. When goodwill does not appear in the books:

The value of the firm’s goodwill is calculated, and then the share of the deceased partner in the goodwill is determined. The remaining partner’s capital account is debited in the gaining ratio, and the retiring partner’s capital a/c is credited with the share of goodwill. The following journal entry is passed:

B. Share in Profit and Loss of the firm:

The deceased partner’s share in profit is calculated from the date of the last Balance Sheet to the date of the death of the partner. The amount share of profit is credited to the Deceased Partner’s Capital account.

i. In case of profit:

ii. In case of loss:

C. Revaluation of Assets and Reassessment of Liabilities:

i. In case of revaluation profit:

ii. In case of revaluation loss:

D. Distribution of Reserves and Undistributed Profit and Loss:

i. For Distribution of Reserves and Accumulated Profits:

ii. For writing off Accumulated Loss:

E. Payment made to Partner’s Executor’s Account:

1. When payment is made in lumpsum:

2. When payment is made in instalments:

When the amount to be paid to the deceased partner to his executor’s account is treated as a loan account and paid in instalments, the executors are entitled to either:

a. Interest @6% p.a. or otherwise stated or mentioned in the Partnership Deed:

Since the amount due to the deceased partner is treated as a loan to be paid by the firm to the deceased partner executor account the interest to be paid on the loan due is either the percentage decided by the remaining partners, and if the question is silent, it is treated as other loan’s and follows Partnership Act provisions, i.e., interest is @ 6% p.a. to be paid.

b. A share in profit in proportion to the capital employed:

i. When interest is due:

ii. When the instalment is paid: