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Ch 6 · Partnership · T.S. Grewal — Double Entry Book Keeping

Death
of a Partner

75 MCQs 50 Flashcards T.S. Grewal Class 12 Updated May 2026
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Chapter Overview

Chapter 6 covers the accounting treatment when a partner DIES during the lifetime of the firm. Death is an involuntary reconstitution: under Section 42(c) of the Indian Partnership Act 1932 the firm stands dissolved on the death of a partner unless the partnership deed expressly provides for continuation by the surviving partners. In practice, almost every modern partnership deed contains such a clause, so death is treated as a reconstitution, very similar to retirement.

The single procedural difference between retirement and death is the need to compute the deceased partner's share of profit from the last balance sheet date till the date of death. This is done either on the Time Basis (using last year's profit, or an average, prorated by months) or on the Sales / Turnover Basis (using the previous year's profit margin applied to actual sales till the date of death). The amount is credited to the deceased's Capital A/c by debiting Profit and Loss Suspense A/c, which is later closed against the year-end P&L A/c.

Other adjustments mirror retirement: Revaluation A/c profit/loss and accumulated reserves/losses are shared in the OLD ratio (including the deceased); goodwill is adjusted by debiting continuing partners in their gaining ratio and crediting the deceased; and the closing balance of the deceased's Capital A/c is transferred to Deceased Partner's Executor's A/c. Settlement may be by cash, equal-principal instalments with interest on the opening balance, or as a loan with interest at the deed-prescribed rate (default 6% p.a. under Section 13(d) / Section 37 IPA 1932).

What You'll Learn
Key Concepts
Concept
Death of a Partner
Involuntary reconstitution of the firm. Surviving partners continue if the deed so provides; otherwise dissolution under Section 42(c) IPA 1932.
Comparison
Death vs Retirement
Both are reconstitutions; treatments are identical EXCEPT death also requires profit till date of death (Time / Sales Basis) since death rarely coincides with year-end.
Profit Calc
Time Basis
Profit = Last year's profit × (Months elapsed / 12) × Deceased's PSR. Use average of last 2-3 years if deed says so. Posted via P&L Suspense A/c.
Profit Calc
Sales (Turnover) Basis
Profit = (Last year's profit / Last year's sales) × Sales till date of death × Deceased's PSR. Preferred when sales are seasonal or uneven.
Goodwill
Goodwill on Death
Not raised in books (AS-26). Adjusted by debiting continuing partners in GAINING RATIO and crediting deceased's Capital A/c with his share of firm goodwill.
Revaluation
Revaluation + Reserves
Revaluation profit/loss + free reserves and accumulated profits/losses → shared in OLD ratio (including the deceased) at the date of death.
Settlement
Executor's A/c
Closing balance of deceased's Capital A/c is transferred here. Settled by cash, instalments (equal principal + interest), or as a loan with interest.
Interest
Interest on Executor's Loan
Default 6% p.a. (Section 13(d) IPA 1932). Always a CHARGE against profit. Deed may prescribe a higher / different rate.
Settlement
Instalment Settlement
Each instalment = Equal Principal + Interest on OPENING balance. Total instalment shrinks each period as the principal is amortised.
Sample MCQs
Q1. Death of a partner is best classified as a:
A. Voluntary reconstitution of the partnership firm
B. Compulsory dissolution of the partnership firm
C. Involuntary reconstitution of the partnership firm
D. Change in the legal form of the firm into a company
Death is an INVOLUNTARY reconstitution: the firm continues with the surviving partners on a fresh footing. It is NOT a dissolution unless the deed expressly provides so or only two partners existed.
Q2. X, Y and Z share profits 2:2:1. Year ends 31 March. Z dies on 30 September. Last year's profit = ₹3,00,000. Z's share of profit till date of death (Time Basis) is:
A. ₹30,000
B. ₹60,000
C. ₹45,000
D. ₹15,000
Months elapsed = 6 (Apr-Sep). Profit for 6 months = 3,00,000 × 6/12 = ₹1,50,000. Z's share = 1,50,000 × 1/5 = ₹30,000. Entry: Dr P&L Suspense ₹30,000 / Cr Z's Capital ₹30,000.
Q3. Amount due to executor = ₹6,00,000, payable in 3 equal annual instalments + interest at 10% p.a. on the opening balance. The FIRST instalment (principal + interest) is:
A. ₹2,00,000
B. ₹2,40,000
C. ₹2,60,000
D. ₹2,80,000
Equal principal = 6,00,000 / 3 = ₹2,00,000. Interest on opening balance = 6,00,000 × 10% = ₹60,000. First instalment = 2,00,000 + 60,000 = ₹2,60,000.
Frequently Asked Questions
How does death of a partner differ from retirement?
Both are reconstitutions of the firm. Retirement is voluntary and usually happens at year-end; death is involuntary and rarely coincides with year-end. The only major procedural difference is that on death, profit from the last balance sheet date till the date of death must be computed (using Time Basis or Sales Basis) and credited to the deceased's Capital A/c via Profit & Loss Suspense A/c. Goodwill, revaluation, accumulated reserves and all other adjustments are treated identically.
How is profit till date of death calculated using the Time Basis?
Profit till date of death = Last year's profit × (Months elapsed from year-start till death ÷ 12) × Deceased partner's share. If the deed prescribes the average of the last 2 or 3 years, replace 'last year's profit' with that average. The amount is credited to the deceased's Capital A/c by debiting Profit & Loss Suspense A/c — since the running year's books are not yet closed at the date of death.
How is profit till date of death calculated using the Sales / Turnover Basis?
Profit till date of death = (Last year's profit ÷ Last year's sales) × Sales till date of death × Deceased's share. Step 1 — compute the previous year's profit margin. Step 2 — apply that margin to actual sales till the date of death. Step 3 — multiply by the deceased's profit-sharing ratio. The Sales Basis is preferred where business is seasonal or sales are uneven (e.g., woollens, festive trades) since it uses the actual turnover till the date of death.
What is an Executor's A/c and how is it settled?
After all death adjustments (revaluation, reserves, goodwill, profit till death), the closing balance of the deceased partner's Capital A/c is transferred to a new account called Deceased Partner's Executor's A/c. The executor (legal heir) is entitled to receive this amount from the firm. Settlement may be by (a) lump-sum cash payment, (b) equal annual instalments of principal plus interest on the opening balance, or (c) retention as a loan to the firm with periodic interest payments. The deed or agreement decides the mode.
What rate of interest applies to the Executor's loan?
If the partnership deed prescribes a rate, that rate applies. If the deed is silent, Section 13(d) of the Indian Partnership Act 1932 fixes the rate at 6% p.a., extended to executor settlements by Section 37. Interest on Executor's A/c is a CHARGE against profit (debited to the regular P&L A/c, NOT the Appropriation A/c) and is payable even when the firm makes a loss. Section 37 also gives the executor a choice between 6% interest and a share of post-death profits attributable to the use of the deceased's share of property.
How is goodwill adjusted on death of a partner?
Goodwill is NOT raised in the books (AS-26 prohibits self-generated goodwill). Instead, the continuing partners are debited in their gaining ratio (New Ratio − Old Ratio) and the deceased partner's Capital A/c is credited with his share of goodwill (= Firm's goodwill × Deceased's PSR). If goodwill already appears in the books, it must first be written off in the OLD ratio (debiting all partners including the deceased) before the gaining-ratio adjustment is made.