Question

How would you calculate the amount payable to the representative of a deceased partner?

Answer 1

1. Calculate the deceased partner’s share of capital: This is based on the partner’s capital account as it stood at the time of death, adjusted for any profit or loss till the date of death.
2. Calculate the share of accumulated profits or losses: This includes the deceased partner's share of any profits or losses that have been accumulated but not yet distributed, such as reserves, general reserve, or profit/loss in the Profit & Loss account.
3. Revaluation of assets and liabilities: The deceased partner's share of any revaluation profit or loss should be calculated and added or subtracted from the capital account.
4. Determine share of goodwill: The deceased partner is entitled to their share of goodwill, which is calculated based on the partnership's method of valuing goodwill.
5. Determine the share of undistributed profits: If any profits are earned but not yet distributed before the partner’s death, the deceased partner’s share must be calculated based on their share of the profits.
6. Account for any drawings: If the deceased partner had made any drawings, the outstanding amounts should be adjusted in the final settlement.
7. Final settlement: Add all the above amounts (capital share, accumulated profits, goodwill, revaluation adjustments) and subtract any outstanding liabilities or drawings to determine the total amount payable to the representative of the deceased partner.

The final settlement can be either in cash or by transferring the amount to a loan account of the deceased partner’s representative, depending on the agreement and liquidity of the firm.