Hello! Welcome to the next lesson in our journey through partnership accounting.
In our last session, you mastered the preparation of the Revaluation Account to adjust asset and liability values. We saw how the resulting profit or loss is distributed among all partners, including the one leaving. Today, we focus on another crucial adjustment specific to the death of a partner.
This lesson is designed to help you achieve the following outcome: Calculate the deceased partner's share of profit up to the date of death on a time or turnover basis.
Unlike retirement, which is usually planned for the end of an accounting year, a partner's death can occur at any time. This means the partner worked for a part of the current year, and their legal representatives are entitled to a share of the profits earned during this "interim" period. Since closing the books and preparing final accounts mid-year is impractical, we must estimate this profit.
1. Understanding Interim Profit
Before we dive into calculations, let's clarify what we mean by interim profit and why it's necessary.
Death of a Partner | Chapter 5 | Accountancy Class 12 | Part 1
This video from Rajat Arora provides an excellent introduction to the concept. It lists what a deceased partner is entitled to and then explains what 'interim profits' are and why they are calculated.
Watch from 02:34 to 06:38. Focus on the list of items the deceased partner will receive and pay close attention to the explanation of 'interim profits' – the profit for the period between the last Balance Sheet and the date of death.
As the video highlighted, the core challenge is calculating the firm's profit for a fraction of the year. Since we don't have final accounts, we rely on estimation methods. There are two primary methods for this: the Time Basis and the Turnover Basis.
2. Method 1: Time Basis
The time basis method uses the profits of previous years as a proxy for the current year's performance. The assumption is that the firm's profitability will be similar to the recent past.
You can use either:
- The profit of the immediately preceding year.
- An average of the profits of several past years.
The calculation involves three steps:
- Determine the estimated profit for the full current year (using last year's profit or average profit as specified in the question).
- Calculate the proportionate profit for the interim period (the time from the start of the year to the date of death).
- Calculate the deceased partner's share of this proportionate profit based on their profit-sharing ratio.
The formula is:
To see this method explained with a clear, step-by-step approach, let's return to the video.
Death of a Partner | Chapter 5 | Accountancy Class 12 | Part 1
The same video now breaks down the 'Time Basis' calculation.
Watch from 06:46 to 09:39. Observe how the full year's profit is first estimated (based on an average) and then prorated for time and the partner's share.
For a detailed textual explanation and examples from your official textbook, please review the following section from the NCERT chapter.
You have learnt that retirement or death of a
Your NCERT textbook clearly outlines the calculation of a deceased partner's profit share on a time basis, with examples using both last year's profit and average profit.
Please read the section 3.9 Death of a Partner (starts on page 141). Focus on the first two calculation examples for Champak’s share of profit: the one based on the preceding year's profit (₹1,00,000) and the one based on the average profit of the last three years (₹1,30,000).
3. Method 2: Turnover (Sales) Basis
The turnover basis is often considered more accurate because it uses the actual sales figures from the current period. The logic is to determine the profit rate from the previous year and apply that same rate to the sales made up to the date of the partner's death.
The calculation involves these steps:
- Calculate the profitability ratio (or gross profit rate) of the previous year:
- Estimate the profit for the interim period by applying this rate to the sales of the interim period:
- Calculate the deceased partner's share of this estimated profit based on their profit-sharing ratio.
Let's watch a detailed breakdown of this method.
Death of a Partner class 12 | Profit/Loss share of Deceased Partner | Class 12 Accounts Partnership
This video by CA Hardik Manchanda provides an excellent, in-depth explanation of the turnover basis, including a clear formula and worked examples.
Watch from 19:37 to 28:15. Pay close attention to how the previous year's profit rate is calculated and then applied to the current period's sales. Notice why you do not multiply by the time period (e.g., 3/12) in this method—it's because the sales figure used is already for that specific period.
Test your understanding!
Arti, Bharti, and Seema are partners sharing profits in the ratio of 3:2:1. Bharti died on 30th June 2022.
- Sales for the year ended 31st March 2022 were ₹6,00,000.
- Profit for the year ended 31st March 2022 was ₹1,20,000.
- Sales from 1st April 2022 to 30th June 2022 were ₹2,00,000.
Calculate Bharti's share of profit up to the date of death.
Show answer
Step 1: Calculate the Profit Rate of the previous year.
Step 2: Estimate the profit for the interim period.
The interim period is from April 1st to June 30th (3 months). Sales for this period are given as ₹2,00,000.
This is the estimated profit for the entire firm for the 3-month period.
Step 3: Calculate Bharti's share.
Bharti's profit share is 2/6.
So, Bharti's share of profit up to the date of death is ₹13,333.
4. Accounting Treatment
Once you've calculated the deceased partner's share of profit, you need to record it. Since this is an estimated profit and the final Profit & Loss Appropriation Account will only be prepared at the year-end, we use a temporary account called the Profit and Loss Suspense Account.
The journal entry to give the deceased partner their share of interim profit is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit & Loss Suspense A/c Dr. | XXX | |||
| To Deceased Partner’s Capital A/c | XXX | |||
| (Being deceased partner's share of profit till the date of death credited to their capital account) |
This entry increases the balance in the deceased partner's capital account, ensuring their executor is credited for it. The P&L Suspense Account will later be closed, but for now, this is the key entry you need to know.
This is clearly demonstrated in the NCERT textbook examples you reviewed and is also explained in the video from Rajat Arora.
Conclusion
Great work! You have now learned how to handle one of the most distinct adjustments related to the death of a partner. Estimating the profit for the part of the year the partner was alive is essential for a fair settlement.
Key Takeaways:
- Interim Profit: A deceased partner's estate is entitled to a share of profits from the last balance sheet date to their date of death.
- Time Basis: Estimate profit based on past performance (last year's or average profit), then prorate for the time period and the partner's share.
- Turnover Basis: Estimate profit by applying the previous year's profit rate to the actual sales of the interim period.
- Journal Entry: The deceased partner's share of this estimated profit is recorded by debiting the P&L Suspense Account and crediting the Deceased Partner’s Capital Account.
Preview of the Next Lesson:
In our upcoming lessons, we'll start putting all the pieces together. We will focus on calculating the total amount due to the retiring or deceased partner, which involves aggregating their capital balance, share of reserves, goodwill, revaluation profit, and this interim profit. We will then learn how this final amount is settled.