ICAI Notes- Unit 5: Death of a Partner | Accounting for CA Foundation PDF Download

 Page 1


 ACCOUNTING
1.
170
10.170 
LEARNING OUTCOMES 
UNIT – 5 DEATH OF A PARTNER 
 
After studying this unit, you would be able to: 
? Understand the implication of the excess money received on death
of a partner from a joint life policy from the insurance company in
the accounts of the partnership. Learn the journal entries required to
record this transaction.
? Understand the accounting implications if death of a partner takes
place at any date during the accounting period. Learn to record this
transaction and how to record payment of profit to the Executor of
the deceased partner for part of the accounting year.
? Be familiar with other accounting treatments in case of death of
partner which are similar to the explained in case of retirement of a
partner.
© The Institute of Chartered Accountants of India
Page 2


 ACCOUNTING
1.
170
10.170 
LEARNING OUTCOMES 
UNIT – 5 DEATH OF A PARTNER 
 
After studying this unit, you would be able to: 
? Understand the implication of the excess money received on death
of a partner from a joint life policy from the insurance company in
the accounts of the partnership. Learn the journal entries required to
record this transaction.
? Understand the accounting implications if death of a partner takes
place at any date during the accounting period. Learn to record this
transaction and how to record payment of profit to the Executor of
the deceased partner for part of the accounting year.
? Be familiar with other accounting treatments in case of death of
partner which are similar to the explained in case of retirement of a
partner.
© The Institute of Chartered Accountants of India
10.171 
PARTNERSHIP AND LLP ACCOUNTS 
 
 
 
5.1  INTRODUCTION 
Business of a partnership firm may not come to an end due to death of a partner as it is known 
as Reconstitution of Partnership. Other partners shall continue to run the business of the firm. 
The problems arising on the death of a partner are similar to those arising on retirement. 
Assets and liabilities have to be revalued and the resultant profit or loss has to be transferred 
to the capital accounts of all partners including the deceased partner. Goodwill is dealt with 
exactly in the way already discussed in the case of retirement in the earlier unit. Treatment of 
joint life policy will also be same as in the case of retirement. However, in case of death of a 
partner, the firm would get the joint policy value.  
 
 
Death 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Payment of 
Deceased 
Partner's Share
Transfer of 
reserves; 
goodwill, 
Transfer of 
profit/loss on 
revaluation to 
dead partner
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Treatment of JLP 
and separate life 
policies
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 ACCOUNTING
1.
170
10.170 
LEARNING OUTCOMES 
UNIT – 5 DEATH OF A PARTNER 
 
After studying this unit, you would be able to: 
? Understand the implication of the excess money received on death
of a partner from a joint life policy from the insurance company in
the accounts of the partnership. Learn the journal entries required to
record this transaction.
? Understand the accounting implications if death of a partner takes
place at any date during the accounting period. Learn to record this
transaction and how to record payment of profit to the Executor of
the deceased partner for part of the accounting year.
? Be familiar with other accounting treatments in case of death of
partner which are similar to the explained in case of retirement of a
partner.
© The Institute of Chartered Accountants of India
10.171 
PARTNERSHIP AND LLP ACCOUNTS 
 
 
 
5.1  INTRODUCTION 
Business of a partnership firm may not come to an end due to death of a partner as it is known 
as Reconstitution of Partnership. Other partners shall continue to run the business of the firm. 
The problems arising on the death of a partner are similar to those arising on retirement. 
Assets and liabilities have to be revalued and the resultant profit or loss has to be transferred 
to the capital accounts of all partners including the deceased partner. Goodwill is dealt with 
exactly in the way already discussed in the case of retirement in the earlier unit. Treatment of 
joint life policy will also be same as in the case of retirement. However, in case of death of a 
partner, the firm would get the joint policy value.  
 
 
Death 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Payment of 
Deceased 
Partner's Share
Transfer of 
reserves; 
goodwill, 
Transfer of 
profit/loss on 
revaluation to 
dead partner
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Treatment of JLP 
and separate life 
policies
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 ACCOUNTING
1.
172
10.172 
5.2 RIGHT OF OUTGOING PARTNER IN CERTAIN CASES 
TO SHARE SUBSEQUENT PROFITS 
As per provisions of Section 37 of the Indian Partnership Act., “Where any member of a firm 
has died or otherwise ceased to be a partner, and the surviving or continuing partners carry 
on the business of the firm with the property of the firm without any final settlement of 
accounts as between them and the outgoing partner or his estate, then, in the absence of a 
contract to the contrary, the outgoing partner or his estate is entitled at the option of himself 
or his representatives to such share of the profits made since he ceased to be a partner as 
may be attributable to the use of his share of the property of the firm or to interest at the rate 
of six per cent per annum on the amount of his share in the property of the firm. 
Provided that whereby contract between the partners an option is given to surviving or 
continuing partners to purchase the interest of a deceased or outgoing partner, and that 
option is duly exercised, the estate of the deceased partner, or the outgoing partner or his 
estate, as the case may be, is not entitled to any further or other share of profits; but if any 
partner assuming to act in exercise of the option does not in all material respects comply with 
the terms thereof, he is liable to account under the foregoing provisions of this section. This 
way, the outgoing partner has the option to receive, interest at the rate of 6% p.a. or the share 
of profit earned on the unsettled amounts for the period till his dues are settled by the firm 
in the absence of any contract made to the contrary”. 
It may be noted that the outgoing partner is not bound to make election until the share of 
the profit that would be payable to him has been ascertained. 
For example, A, B and C are in a partnership business-sharing profits and losses equally. C 
died on 31st October, 2021. The capitals of the partners, after all necessary adjustments stood 
at ` 50,000, `75,000 and ` 1,20,000 respectively. A and B continued to carry on the business 
further without settling the accounts of C. Final payment to C is made on February 1, 2022. 
The profit made during the period of three months amounts to ` 28,000. 
Under Section 37 of the Partnership Act, C can exercise any of the following two options. 
(i) Share in subsequent profits of firm:
Profit made—
`
 28,000
C’s share – 28,000× 
1,20,000
2,45,000
= 
`
 13,714
© The Institute of Chartered Accountants of India
Page 4


 ACCOUNTING
1.
170
10.170 
LEARNING OUTCOMES 
UNIT – 5 DEATH OF A PARTNER 
 
After studying this unit, you would be able to: 
? Understand the implication of the excess money received on death
of a partner from a joint life policy from the insurance company in
the accounts of the partnership. Learn the journal entries required to
record this transaction.
? Understand the accounting implications if death of a partner takes
place at any date during the accounting period. Learn to record this
transaction and how to record payment of profit to the Executor of
the deceased partner for part of the accounting year.
? Be familiar with other accounting treatments in case of death of
partner which are similar to the explained in case of retirement of a
partner.
© The Institute of Chartered Accountants of India
10.171 
PARTNERSHIP AND LLP ACCOUNTS 
 
 
 
5.1  INTRODUCTION 
Business of a partnership firm may not come to an end due to death of a partner as it is known 
as Reconstitution of Partnership. Other partners shall continue to run the business of the firm. 
The problems arising on the death of a partner are similar to those arising on retirement. 
Assets and liabilities have to be revalued and the resultant profit or loss has to be transferred 
to the capital accounts of all partners including the deceased partner. Goodwill is dealt with 
exactly in the way already discussed in the case of retirement in the earlier unit. Treatment of 
joint life policy will also be same as in the case of retirement. However, in case of death of a 
partner, the firm would get the joint policy value.  
 
 
Death 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Payment of 
Deceased 
Partner's Share
Transfer of 
reserves; 
goodwill, 
Transfer of 
profit/loss on 
revaluation to 
dead partner
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Treatment of JLP 
and separate life 
policies
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 ACCOUNTING
1.
172
10.172 
5.2 RIGHT OF OUTGOING PARTNER IN CERTAIN CASES 
TO SHARE SUBSEQUENT PROFITS 
As per provisions of Section 37 of the Indian Partnership Act., “Where any member of a firm 
has died or otherwise ceased to be a partner, and the surviving or continuing partners carry 
on the business of the firm with the property of the firm without any final settlement of 
accounts as between them and the outgoing partner or his estate, then, in the absence of a 
contract to the contrary, the outgoing partner or his estate is entitled at the option of himself 
or his representatives to such share of the profits made since he ceased to be a partner as 
may be attributable to the use of his share of the property of the firm or to interest at the rate 
of six per cent per annum on the amount of his share in the property of the firm. 
Provided that whereby contract between the partners an option is given to surviving or 
continuing partners to purchase the interest of a deceased or outgoing partner, and that 
option is duly exercised, the estate of the deceased partner, or the outgoing partner or his 
estate, as the case may be, is not entitled to any further or other share of profits; but if any 
partner assuming to act in exercise of the option does not in all material respects comply with 
the terms thereof, he is liable to account under the foregoing provisions of this section. This 
way, the outgoing partner has the option to receive, interest at the rate of 6% p.a. or the share 
of profit earned on the unsettled amounts for the period till his dues are settled by the firm 
in the absence of any contract made to the contrary”. 
It may be noted that the outgoing partner is not bound to make election until the share of 
the profit that would be payable to him has been ascertained. 
For example, A, B and C are in a partnership business-sharing profits and losses equally. C 
died on 31st October, 2021. The capitals of the partners, after all necessary adjustments stood 
at ` 50,000, `75,000 and ` 1,20,000 respectively. A and B continued to carry on the business 
further without settling the accounts of C. Final payment to C is made on February 1, 2022. 
The profit made during the period of three months amounts to ` 28,000. 
Under Section 37 of the Partnership Act, C can exercise any of the following two options. 
(i) Share in subsequent profits of firm:
Profit made—
`
 28,000
C’s share – 28,000× 
1,20,000
2,45,000
= 
`
 13,714
© The Institute of Chartered Accountants of India
10.173 
PARTNERSHIP AND LLP ACCOUNTS 
(ii) Interest at 6% p.a.
1,20,000× 
6
100
 x 
3
12
 = 
`
 1,800
Since, (i) option is beneficial for C, he will necessarily go for his proportionate share in profits. 
5.3 AMOUNT PAYABLE TO LEGAL REPRESENTATIVES 
OF DEAD PARTNER 
When the partner dies the amount payable to him/her is paid to his/her legal representatives. 
The representatives are entitled to the followings: 
(a) The amount standing to the credit to the capital account of the deceased partner
(b) Interest on capital, if provided in the partnership deed upto the date of death:
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities;
(f) Share of profit upto the date of death;
(g) Share of Joint Life Policy.
Legal representatives are liable for:
(i) Drawings
(ii) Interest on drawings
(iii) Share of loss on the revaluation of assets and liabilities;
(iv) Share of loss that have occurred till the date of his/her death.
Calculation of profit upto the date of death of a partner.
Such Profit is calculated through P&L Suspense account. After ascertaining the amount due 
to the deceased partner, it should be credited to his Executor’s Account. 
If the death of a partner occurs during the year, the representatives of the deceased partner 
are 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: 
(i) Time Basis
(ii) Turnover or Sales Basis
© The Institute of Chartered Accountants of India
Page 5


 ACCOUNTING
1.
170
10.170 
LEARNING OUTCOMES 
UNIT – 5 DEATH OF A PARTNER 
 
After studying this unit, you would be able to: 
? Understand the implication of the excess money received on death
of a partner from a joint life policy from the insurance company in
the accounts of the partnership. Learn the journal entries required to
record this transaction.
? Understand the accounting implications if death of a partner takes
place at any date during the accounting period. Learn to record this
transaction and how to record payment of profit to the Executor of
the deceased partner for part of the accounting year.
? Be familiar with other accounting treatments in case of death of
partner which are similar to the explained in case of retirement of a
partner.
© The Institute of Chartered Accountants of India
10.171 
PARTNERSHIP AND LLP ACCOUNTS 
 
 
 
5.1  INTRODUCTION 
Business of a partnership firm may not come to an end due to death of a partner as it is known 
as Reconstitution of Partnership. Other partners shall continue to run the business of the firm. 
The problems arising on the death of a partner are similar to those arising on retirement. 
Assets and liabilities have to be revalued and the resultant profit or loss has to be transferred 
to the capital accounts of all partners including the deceased partner. Goodwill is dealt with 
exactly in the way already discussed in the case of retirement in the earlier unit. Treatment of 
joint life policy will also be same as in the case of retirement. However, in case of death of a 
partner, the firm would get the joint policy value.  
 
 
Death 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Payment of 
Deceased 
Partner's Share
Transfer of 
reserves; 
goodwill, 
Transfer of 
profit/loss on 
revaluation to 
dead partner
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Treatment of JLP 
and separate life 
policies
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 ACCOUNTING
1.
172
10.172 
5.2 RIGHT OF OUTGOING PARTNER IN CERTAIN CASES 
TO SHARE SUBSEQUENT PROFITS 
As per provisions of Section 37 of the Indian Partnership Act., “Where any member of a firm 
has died or otherwise ceased to be a partner, and the surviving or continuing partners carry 
on the business of the firm with the property of the firm without any final settlement of 
accounts as between them and the outgoing partner or his estate, then, in the absence of a 
contract to the contrary, the outgoing partner or his estate is entitled at the option of himself 
or his representatives to such share of the profits made since he ceased to be a partner as 
may be attributable to the use of his share of the property of the firm or to interest at the rate 
of six per cent per annum on the amount of his share in the property of the firm. 
Provided that whereby contract between the partners an option is given to surviving or 
continuing partners to purchase the interest of a deceased or outgoing partner, and that 
option is duly exercised, the estate of the deceased partner, or the outgoing partner or his 
estate, as the case may be, is not entitled to any further or other share of profits; but if any 
partner assuming to act in exercise of the option does not in all material respects comply with 
the terms thereof, he is liable to account under the foregoing provisions of this section. This 
way, the outgoing partner has the option to receive, interest at the rate of 6% p.a. or the share 
of profit earned on the unsettled amounts for the period till his dues are settled by the firm 
in the absence of any contract made to the contrary”. 
It may be noted that the outgoing partner is not bound to make election until the share of 
the profit that would be payable to him has been ascertained. 
For example, A, B and C are in a partnership business-sharing profits and losses equally. C 
died on 31st October, 2021. The capitals of the partners, after all necessary adjustments stood 
at ` 50,000, `75,000 and ` 1,20,000 respectively. A and B continued to carry on the business 
further without settling the accounts of C. Final payment to C is made on February 1, 2022. 
The profit made during the period of three months amounts to ` 28,000. 
Under Section 37 of the Partnership Act, C can exercise any of the following two options. 
(i) Share in subsequent profits of firm:
Profit made—
`
 28,000
C’s share – 28,000× 
1,20,000
2,45,000
= 
`
 13,714
© The Institute of Chartered Accountants of India
10.173 
PARTNERSHIP AND LLP ACCOUNTS 
(ii) Interest at 6% p.a.
1,20,000× 
6
100
 x 
3
12
 = 
`
 1,800
Since, (i) option is beneficial for C, he will necessarily go for his proportionate share in profits. 
5.3 AMOUNT PAYABLE TO LEGAL REPRESENTATIVES 
OF DEAD PARTNER 
When the partner dies the amount payable to him/her is paid to his/her legal representatives. 
The representatives are entitled to the followings: 
(a) The amount standing to the credit to the capital account of the deceased partner
(b) Interest on capital, if provided in the partnership deed upto the date of death:
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities;
(f) Share of profit upto the date of death;
(g) Share of Joint Life Policy.
Legal representatives are liable for:
(i) Drawings
(ii) Interest on drawings
(iii) Share of loss on the revaluation of assets and liabilities;
(iv) Share of loss that have occurred till the date of his/her death.
Calculation of profit upto the date of death of a partner.
Such Profit is calculated through P&L Suspense account. After ascertaining the amount due 
to the deceased partner, it should be credited to his Executor’s Account. 
If the death of a partner occurs during the year, the representatives of the deceased partner 
are 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: 
(i) Time Basis
(ii) Turnover or Sales Basis
© The Institute of Chartered Accountants of India
 ACCOUNTING
1.
174
10.174 
(i) 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 ` 2,25,000 and a partner dies three months after the close 
of previous year, the profit of three months is ` 31,250 i.e. 1,25,000 × 3/12, if the deceased 
partner took 2/10 share of profit, his/her share of profit till the date of death is ` 6,250 i.e. ` 
31,250 × 2/10 
(ii) Turnover or Sales Basis
In this method, we have to take into consideration 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. Profit is assumed to be earned uniformly at the same rate.  
Example 
Arun, Tarun and Neha are partners sharing profits in the ratio of 3:2:1. Neha dies on 31st May 
2022. Sales for the year 2021-2022 amounted to ` 4,00,000 and the profit on sales is ` 60,000. 
Accounts are closed on 31 March every year. Sales from 1st April 2022 to 31st May 2022 is 
` 1,00,000.  The deceased partner’s share in the profit upto the date of death will be as follows. 
Profit from 1st April 2022 to 31st May 2022 on the basis of sales: 
If sales are ` 4,00,000, profit is ` 60,000 
If the sales are ` 1,00,000 profit is: 60,000/4,00,000 × 1,00,000 = ` 15,000 
Neha’s share = 15,000 × 1/6 = ` 2,500 
Alternatively profit is calculated as 
Rate of profit =   
60,000
4,00,000
x 100 = 15% 
Sale upto date of death = 1,00,000 
Profit = 1,00,000 x 15/100 = ` 15,000 
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 
© The Institute of Chartered Accountants of India