Death Of A Partner -
Amount Due Transferred To Legal Heir's A/c

Death of a partner dissolves the partnership if an agreement to the contrary does not exist. This means that the firm will not get dissolved on the death of a partner if the partnership deed specifically provides for this or if the partners decide to continue the partnership by purchasing the share of the deceased partner.

If a partner dies, the firm stands dissolved automatically, if an agreement to the contrary does not exist. The banker may, therefore, continue the account of the firm for the purpose of winding up of the partnership firm. But the banker should not honour the cheques drawn by the deceased partner without receiving confirmation from the remaining partners.

The banker, on the reconstitution of the firm, may open a fresh new account after receiving a fresh mandate from the partners. If the firm's account shows any debit balance at the time of partner's death, the latter's estate would be liable to pay off the debts incurred by the firm before his death. Thus to determine the liability of the deceased partner, the banker should close the account of the firm soon after death of a partner. If he defaults in doing so, the rule in Clayton's case will apply. A new account should be opened in the name of the reconstituted firm with fresh mandate and undertaking etc.

Accounting Procedure On Of Death Of A Partner:

On the death of a partner, the accounting treatment regarding goodwill, revaluation of assets and liabilities, accumulated reserves and undistributed profit are similar to that of the retirement of a partner, with the exception that the amount owing to the retiring partner is transferred to his loan account but the amount payable to the deceased partner is transferred to his legal heir's account.

The legal representatives are entitled to the followings:

  1. The credit balance of the capital account of the deceased Partner.
  2. Interest on capital,(if any) provided in the partnership deed up to the date of death.
  3. Share in the value of goodwill of the firm.
  4. Share of undistributed profit or reserves.
  5. Share of profit on the revaluation of assets and liabilities.
  6. Share of profit up to the date of death.
  7. Share of Joint Life Policy.

Also, there may be some amount that needs to be deducted or debited to the account of the deceased partner's legal representatives:

  1. Drawings.
  2. Interest on drawings.
  3. Share of loss on the revaluation of assets and liabilities.
  4. Share of losses that have occurred till the date of his/her death.

The above adjustments are made in the capital account of the deceased partner and then the balance in the capital account is transferred to an account opened in the name of his/her executor. The payment of the amount of the deceased partner depends on the agreement. In the absence of an agreement, the legal representative of a deceased partner is entitled to interest @ 6% p.a. on the amount due from the date of death till the date of final payment.

Calculation Of Profit Up To The Date Of Death Of A Partner:

If a partner dies occurs during the financial year, the legal representative of the deceased partner is entitled to his/her share of profits earned till the date of his/her death. Such profit is ascertained by any of the following methods:

  1. Time Basis
  2. Turnover or Sales Basis
1. Time Basis:

In this case, it is assumed that profit has been earned uniformly throughout the year.

For example:

The total profit of previous year is Rs. 6,00,000.00 and a partner dies three months after the close of previous year, the profit of three months is Rs. 50,00.00 i.e. 6,00,000X3/12, if the deceased partner took 2/10 share of profit, his/her share of profit till the date of death is Rs. 10,000.00 i.e. Rs. 50,000X2/10

2. Turnover or Sales Basis:

In this method, consideration is given to the profit and the total sales of the last year. Thereafter the profit up to the date of death is estimated on the basis of the sale of the last year.

Here profit is assumed to be earned uniformly at the same rate.