Calculating Deceased Partner's Profit Share

When a partner dies, their share of profit or loss for the period from the date of the last balance sheet up to the date of their death needs to be calculated and given to their legal representatives. This calculation is necessary because the partnership firm usually prepares its final accounts at the end of its financial year, which may not coincide with the date of death.

There are typically two common methods used to calculate the deceased partner's share of profit or loss for this specific period:

• Time Basis
• Sales Basis

Understanding the Time Basis for Profit Calculation

Under the Time Basis method, the profit or loss share of the deceased partner is estimated based on the profits of the previous year or the average profits of the last few years. This profit figure is then apportioned for the period the deceased partner was alive in the current financial year.

Steps involved in Time Basis:

1. Determine the profit of the previous year or the average profit of past years.
2. Calculate the profit up to the date of death based on the time period. If the profit used is annual, calculate the proportional profit for the number of months or days from the last balance sheet date to the date of death.
3. Calculate the deceased partner's share in this proportional profit based on their profit-sharing ratio.

For example, if the last balance sheet was on 31st March, a partner died on 30th June (3 months later), and the previous year's profit was $1,00,000, with the deceased partner having a 1/4th share:

• Proportional profit for 3 months = $1,00,000 × $(3/12)$ = $25,000
• Deceased partner's share = $25,000 × $(1/4)$ = $6,250

Understanding the Sales Basis for Profit Calculation

Under the Sales Basis method, the profit or loss share is estimated based on the sales made during the period from the last balance sheet date to the date of death. This method assumes that profit is directly proportional to sales. The profit rate (profit as a percentage of sales) from the previous year or past years is used to estimate the profit for the current period's sales.

Steps involved in Sales Basis:

1. Determine the sales from the last balance sheet date to the date of death.
2. Determine the total sales and profit of the previous year or past years to calculate the profit ratio on sales. Profit Ratio = $\left(\frac{\text{Previous Year's Profit}}{\text{Previous Year's Sales}}\right) \times 100$
3. Estimate the profit for the current period by applying the profit ratio to the sales made up to the date of death. Estimated Profit = Sales up to Date of Death × Profit Ratio
4. Calculate the deceased partner's share in this estimated profit based on their profit-sharing ratio.

For example, if the last balance sheet was on 31st March, a partner died on 30th June, sales up to 30th June were $50,000, and last year's sales were $2,00,000 with a profit of $40,000, and the deceased partner had a 1/4th share:

• Previous year's profit ratio = $\left(\frac{$40,000}{$2,00,000}\right) \times 100 = 20\%$
• Estimated profit up to death = $50,000 × $20\%$ = $10,000
• Deceased partner's share = $10,000 × $(1/4)$ = $2,500

Choosing the Basis for Calculation

The partnership deed may specify which method (Time Basis or Sales Basis) should be used. If the deed is silent, the partners might agree on a method based on past practice or what seems more appropriate given the nature of the business. Therefore, either Time Basis or Sales Basis can be the basis for calculating the deceased partner's share of profit or loss from the date of the last balance sheet to the date of death.

Revision Table: Deceased Partner Profit Share

Additional Information: Deceased Partner Accounting

Beyond the profit or loss share calculation, accounting for a deceased partner involves several other adjustments:

• Revaluation of Assets and Liabilities: Assets and liabilities are often revalued at the time of a partner's death to reflect their current values. The gain or loss on revaluation is shared among all partners (including the deceased partner) in their old profit-sharing ratio.
• Accumulated Profits, Reserves, and Losses: Undistributed profits, reserves, and accumulated losses appearing in the balance sheet are distributed among all partners in their old profit-sharing ratio. The deceased partner's share is credited for profits/reserves and debited for losses.
• Goodwill: The deceased partner is entitled to their share of the firm's goodwill. Goodwill is valued, and the deceased partner's share is typically calculated and adjusted through the remaining partners' capital accounts or by raising and writing off goodwill.
• Joint Life Policy: If the firm has taken out a joint life policy on the lives of partners, the amount received on the death of a partner is distributed among all partners (including the deceased partner) in their profit-sharing ratio.
• Payment to Executor: The total amount due to the deceased partner (including their capital, share of profits/losses, revaluation gain/loss, reserves, goodwill, etc., less any drawings or loans) is calculated and paid to their legal representative or executor.

These adjustments ensure a fair settlement of the deceased partner's account.