Question

M, N and O were partners in a firm sharing profits and losses equally. Their Balance Sheet as at 31st March, 2025 was as follows:

Liabilities		₹	₹	₹
Capitals:		2,10,000	Plant and Machinery	60,000
M	70,000		Stock	30,000
N	70,000		Sundry Debtors	95,000
O	70,000		Cash at Bank	40,000
General Reserve		30,000		35,000
Creditors		20,000
		2,60,000		2,60,000

N died on 12th June, 2025. According to the Partnership Deed, executors of the deceased partner are entitled to:

1. Balance of partner’s capital account.
2. Interest on Capital @ 5% p.a.
3. Share of goodwill calculated on the basis of twice the average of past three year’s profits and
4. Share of profits from the closure of the last accounting year till the date of death on the basis of twice the average of three completed year’s profits before death.

Profits for the years ended on 31st March, 2023, 2024 and 2025 were ₹ 80,000, ₹ 90,000 and ₹ 1,00,000 respectively. Show the working for deceased partner’s share of goodwill and profits till the date of his death. Pass the necessary journal entries and prepare N’s Capital Account to be rendered to his executors.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	General Reserve A/c         ...Dr.		10,000
	To N’s Capital A/c			10,000
	(Being transfer of N’s share of general reserve to his capital A/c)
	Interest on Capital A/c       ...Dr.		700
	To N’s Capital A/c			700
	(Being Interest 5% p.a. credited to N’s Capital A/c)
	M’s Capital A/c     ...Dr.		30,000
	O’s Capital A/c      ...Dr.		30,000
	To N’s Capital A/c			60,000
	(Being the share of Goodwill Adjusted)
	Profit and Loss Suspense A/c    ...Dr.		12,000
	To N’s Capital A/c			12,000
	(Being the transfer of N’s Share of Profit to his capital A/c upto the date of his death)
	N’s Capital A/c      ...Dr.		1,52,700
	To N’s Executor A/c			1,52,700
	(Being the transfer of amount due to N’s = 1 × 5 executor A/c)

 

Dr.	N’s Capital A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To N’s Executor’s A/c	1,52,700	By Balance b/d	70,000
		By General reserve A/c	10,000
		By Interest on capital A/c	700
		By M’s Capital A/c	30,000
		By O’s Capital A/c	30,000
		By Profit & Loss Suspense A/c	12,000
	1,52,700		1,52,700

Working note:

(i) Calculation of Goodwill = Average Profit × No. of year of Purchase 

= 9000 × 2

= ₹ 1,80,000

(ii) Average Profit = `"Total Profit"/"No. of year"` 

= `270000/3`

= ₹ 90,000

(iii) N’s Share in Goodwill = `180000xx1/3` 

= ₹ 60,000

M’s Share = `60,000xx1/2` = ₹ 30,000 

O’s Share = `60,000xx1/2` = ₹ 30,000 

(iv) Calculation of N’s Share of Profit till the Date of Death 

N’s Share of Profit = `(90000 xx 2xx73/365xx1/3)`

= ₹ 12,000