Death of a Partner
The accounting treatment at the time of death of a partner is same as at the time of retirement. Main
difference between the two is that of closing of the account of business. Deceased partner’s capital
account is credited with his opening capital, interest on capital up to his death, his share in undistributed
profits, revaluation profits, and firm’s profits from the date of the last balance sheet up to his death and
with his share of goodwill. Drawings, interest on drawings and losses are debited in the deceased
partner’s
Capital Account and the remaining amount is transferred to his legal representative’s account. Legal
representative can receive either interest at 6 per cent per annum, on the amount due from the date of
death to the date of settlement or the profit earned with the help of that amount.
Calculation of Deceased Partner's Share of Profit
The deceased partner's share of profit is to be determined either on the basis of time or turnover.
(a) On the basis of time: In this case, it is assumed that the profit during the previous year has been
earned uniformly in all months during the year, provided previous year is taken as the base for
calculation of profit. Sometimes average profits of the past three or four years are taken as base
rather than the previous year. Whatever base may be taken, it is to be multiplied by the period
for which the deceased partner remained in the firm and also his profit sharing ratio at the time
of his death. For example A, B, and C are partners in a firm sharing profits and losses in the ratio
of 3 : 2 : 1. B dies on 14th March, 1996. The average of the last three years is Rs. 30,000. B's
share of profit on the basis of time is calculated as under:
Average yearly profit = Rs. 30,000
Profit for 73 days i.e., Jan. 1 to March 14, 1996
B’s Share = 2/6 x 6000 = Rs. 2000
On the basis of turnover: In this method, average past profit is divided
into two portions i.e., before the death and after the death on the basis of ratio of
turnover to the date of death to average turnover and then deceased partner's share is
calculated and credited to his capital account. For example, A, B and C are partners in
a firm sharing profits and losses in the ratio of 3 : 2 : 1. B dies on 14th March, 1996.
Turnover from 1st January, to 14th March, 1996 is Rs. 42,000. Average turnover of the last three years is
Rs. 60,000 and profit is Rs. 30,000. B's share of profit on this basis will be calculated as under:
Average turnover = Rs. 60,000
Sales to the date of death = Rs. 42,000.
Profit to the date of death = Rs. 42,000 × ……. = Rs. 21,000
B's share of profit = 21,000 / 3 = Rs. 7,000.
Treatment of Life Policies
To make an arrangement for the payment of amount belonging to deceased partner to his legal
representative, the firm can get insured the life of all the partners jointly or individually. Premiums on
life policies are paid out of firm’s funds and this is debited to firm’s Profit and Loss Account. Amount
received in the form of claim from the life insurance company is credited to all the partners in their
profit/loss sharing ratio. In the case of individual policies also, the deceased partner is entitled to his
share in the surrender value of policies of all the partners. Other partners are also entitled to their
respective share in the amount of policy of the deceased partner.
Example
Brown and Smith are partners. The partnership deed provides inter alia:
i)
ii)
iii)
That the Account be balanced on 31st December each year.
That the profits are divided as follows: Brown 1/2; Smith 1/3 and carried to a Reserve
account 1/6.
That in the event of the death of a partner, his executors be entitled to be paid :
(a) The capital to his credit at the date of death.
(b) His proportion of reserve at the date of last balance sheet.
(c) His proportion of profit to date of death based on the average profits of the last three
completed years.
(d) By way of goodwill his proportion of the total profits for the three preceding years.
On 31st December, 1989, the Ledger balances were:
Particulars
Brown’s Capital
Smith’s Capital
Reserve
Creditors
Bills Receivable
Investments
Cash
Amount
2,000
5,000
14,000
21,000
Amount
9,000
6,000
3,000
3,000
21,000
The profit for three years was:
1987 - Rs. 4200, 1988 - Rs. 3900, 1989 - Rs. 4500. Smith died on 1st May, 1990
Show the accounts as between the firm and Smith’s died on 1st May, 1990
Solution
Effective profit sharing ratio between Brown and Smith is 3:2 Smith’s share in the profits to the date of
death
Particulars
Profit for 1987
Profit for 1988
Profit for 1989
Total Profits
Amount
4,200
3,900
4,500
12,600
Average = Rs. 12,600/3 = Rs. 4,200
Profit for 4 months up to May 1, 1990 = 4,200 × 1/3 = Rs. 1,400
Smith’s share therein = Rs. 1,400 × 2/5 = 560
Smith’s share in Goodwill:
Goodwill = Rs. 12,600
Smith’s share = Rs. 12,600 × 2/5 = Rs. 5,040
Joint Life Policy
Accounting treatment of Joint Life Policy may be done by any of following methods:
1. First Method: When payment of premium is considered as business expenditure
Under this method, the amount of premium is charged to Profit and Loss Account of each year
and the amount received from insurance company on the death of any partner is treated as
income. Bank Account will be debited and Joint Life Policy Account will be credited with the
amount received from the insurance company on the death of a partner. Then Joint Life Policy
Account is closed by transferring it to all the partners’ Capital Accounts (including the deceased
partner) in their profit sharing ratio. The main problem in this method is that no surrender value
of policy is shown in the books.
2. Second Method : When surrender value is treated as an asset
In this method at the time of payment of premium, the Joint Life Policy Account is debited and
Bank Account is credited. That amount of premium which is more than surrender value at the
end of year, it is assumed as loss with which Profit and Loss Account is debited and Joint Life
Policy Account is credited. Joint Life Policy Account (Surrender Value) is shown as asset in the
Balance Sheet.
At the time of death of any partner, Bank Account is debited and Joint Life Policy Account is
credited with the amount received. Credit balance of Joint Life Policy Account is considered as
profit and transferred to all partners’ capital accounts in their profit-loss sharing ratio.
The main advantage of this method is that surrender value is considered as an asset and
disadvantage is that the premium is not shown fully as an expense in Profit and Loss Account.
3. Third Method: When premium is considered as an asset
With the amount of premium paid, Joint Life Policy Account is debited and Bank Account is
credited. Joint Life Policy Account is shown as an asset in the Balance Sheet. At the time of death
of any partner, Bank Account is debited and Joint Life Policy Account is credited. After his, if
there is any credit balance in Joint Life Policy Account, it is distributed among all partners in
their profit sharing ratio.
4. Fourth Method: When payment of premium is treated as an investment and a Reserve Account
is opened:
i.
Premium is debited to Joint Life Policy Account.
ii.
Every year amount equal to the premium is debited to Profit and Loss Appropriation
Account and credited to Joint Life Policy Reserve Account.
iii.
3. Joint Life Policy Account and Joint Life Policy Reserve Account are adjusted in such a
way that the balance in each account is equal to surrender value of the policy.
iv.
At the death of a partner Joint Policy Account is credited with the amount received.
Credit balance of Joint Policy Reserve Account is transferred to Joint Life Policy Account
and Joint Life Policy Account is closed by transferring to Capital Accounts of all the
partners in their profit sharing ratio.
Under this method, surrender value is shown on the assets side and Joint Life
Policy Reserve Account on liabilities side of Balance Sheet.
Main advantage of this method is that surrender value is shown in Balance Sheet and all premiums is
charged from Profit and Loss Appropriation Account.
Example
A and B are partners in a firm. On April 1, 1997 they took out a Joint Life Policy without profits for Rs.
30,000 upon which an annual premium of Rs. 1,400 is payable. A and B share profits in the ratio of 2 : 1.
On March 31, 1998 B died and Rs. 30,000 is received from the Insurance Company.
Journalise the above transactions. Premium is to be adjusted through Profit and Loss Account.
(b) A and B who shared profits in the ratio of 3 : 2 took a joint life policy on May 1, 1995 for Rs. 30,000.
The annual premium was Rs. 1,300. The surrender value of the policy was:
1995 Nil; 1996 - Rs. 400; 1997 - Rs. 900; 1998 - Rs. 1,450
B died on September 15, 1995 and the amount of the policy was received on Dec. 31, 1998. The books
are closed on Dec. 31, each year. Show Joint Life Policy Account and Joint Life Policy Reserve Account
assuming that premiums were written off through Joint life Policy Reserve Account.
Solution
Date
Particulars
1-Apr Joint Life Policy Premium A/c
To Bank A/c
Amount
Amount
1,400
1,400
(Being the payment of annual
premium)
1998
Mar. 31
Mar. 31
Profit and Loss Account
To Joint Life Policy Premium
A/c
(Being Premium charged to P
& L A/c)
Insurance Company A/c
To Joint Life Policy A/c
(Being the amount of J.L.P. due
for receipt)
1,400
1,400
30,000
30,000
Mar. 31
Mar. 31
Bank Account
To Insurance Company A/c
30,000
30,000
(Being the receipt of claim
from Insurance Company)
Joint Life Policy A/c
To A’s Capital A/c
To B’s Capital A/c
30,000
20,000
10,000
(Being the amount of policy
distributed between partners
in the ratio of 2 : 1)
Joint Life Policy
Date
Particulars
Amount
Date
1995
May 1
To Bank A/c
1995
1,300 Dec 31
1996
May 1
To Bank A/c
1996
1,300 Dec 31
Particulars
By J.L.P. Reserve A/c
1,300
By J.L.P. Reserve A/c
By Balance c/d
900
400
1,300
By J.L.P. Reserve A/c
800
1,300
1997
Jan 1
To Balance b/d
1997
May 1
To Bank A/c
1998
Jan 1
To Balance b/d
1-May To Bank A/c
31-Dec To Capital
A:
B:
1997
400 Dec 31
1,300
1700
1998
900 Sept 15
1300
17220
11480
30900
Amount
By Balance c/d
By Bank a/c
By J.L.P. Reserve A/c
900
1700
30000
900
30900
Joint Life Policy Reserve Account
Date
Particulars
1995
Dec 31
To Joint Life Policy a/c
1996
Dec 31
1997
Dec 31
1998
Sept 15
To Joint Life Policy a/c
To Balance c/d
To Joint Life Policy a/c
To Balance c/d
To Joint Life Policy a/c
Amount
Date
1995
1300 Dec 31
1996
900 Dec 31
400
1300
1997
800 Dec 31
900
1700
1998
900 Sept 15
Particulars
Amount
By P&L App A/c
1300
By P&L App A/c
1300
1300
By P&L App A/c
By Balance b/d
1300
400
1700
By Balance b/d
900