1. Legal Position on Death
- Death automatically dissolves the existing partnership [Section 42, IPA 1932] unless the deed provides otherwise.
- The legal heirs/executor of the deceased is entitled to the deceased's share of firm assets — not to become a partner unless agreed.
- The firm is liable to pay the deceased's share to their estate within the time agreed in the deed, or immediately.
2. Calculation of Amounts Due to Executor
| Item | Calculation | Entry |
|---|---|---|
| Capital balance | Last balance sheet capital + any additions | Dr Deceased's Capital A/c | Cr Executor's A/c |
| Goodwill share | Firm's goodwill × deceased's old ratio | Charged to continuing partners in gaining ratio; credited to Executor's A/c |
| General Reserve share | Reserve × deceased's old ratio | Dr General Reserve A/c | Cr Executor's A/c |
| Revaluation profit/loss | Revaluation profit × old ratio (if assets revalued at death) | From Revaluation A/c to Executor's A/c |
| Share of profit to date of death | Time basis: Annual profit × months/12 × deceased's ratio Sales basis: Profit × (sales in period / annual sales) × ratio | Dr P&L Suspense A/c | Cr Executor's A/c |
| Less: Drawings to date of death | Drawings from start of year to death | Dr Executor's A/c | Cr Bank/Drawings A/c |
3. P&L Suspense Account
Since the profit to date of death is estimated (the actual profit will only be known at year-end), a special account called the P&L Suspense Account is opened:
Dr P&L Suspense A/c | Cr Executor's Account (deceased's share of profit to date)
At the year end, when actual profit is computed, the P&L Suspense A/c balance is adjusted through the P&L Appropriation Account.
4. Fully Worked Example
A, B, C share profits 3:2:1. C dies on 1st October (6 months into year). Previous year's profit = ₹72,000. Firm's goodwill = ₹60,000. C's capital = ₹40,000. General Reserve = ₹30,000. Gaining Ratio A:B = 1:1 (assume). No drawings.
C's share of profit to date (time basis): ₹72,000 × 6/12 × 1/6 = ₹6,000
C's goodwill share: ₹60,000 × 1/6 = ₹10,000 → borne by A and B equally (GR 1:1): Dr A's Capital 5,000; Dr B's Capital 5,000
C's General Reserve share: ₹30,000 × 1/6 = ₹5,000
| C's Executor's Account | |||
|---|---|---|---|
| Dr | ₹ | Cr | ₹ |
| Balance (final due) | 61,000 | Capital A/c | 40,000 |
| Goodwill (1/6 × 60,000) | 10,000 | ||
| General Reserve (1/6 × 30,000) | 5,000 | ||
| P&L Suspense (profit to date) | 6,000 | ||
| Total | 61,000 | Total | 61,000 |
Journal entries summary:
Dr C's Capital A/c 40,000 | Cr C's Executor's A/c 40,000 (transfer capital)
Dr A's Capital A/c 5,000; B's Capital A/c 5,000 | Cr C's Executor's A/c 10,000 (goodwill in GR)
Dr General Reserve A/c 5,000 | Cr C's Executor's A/c 5,000 (reserve share)
Dr P&L Suspense A/c 6,000 | Cr C's Executor's A/c 6,000 (profit to date)
