Discuss the various methods of computing the share in profits in the event of death of a partner.
The death of a partner may occur at any time during the accounting period, unlike retirement which normally takes place at the end of an accounting period. The deceased partner's claim includes his share of profit or loss, interest on capital, and interest on drawings from the date of the last Balance Sheet to the date of death.
Since it is considered cumbersome to close the books and prepare final accounts for the intervening period, the deceased partner's share of profit may be calculated using alternative methods without preparing final accounts.
First, on the basis of last year's profit. The profit of the previous year is proportioned for the period from the last Balance Sheet date to the date of death, multiplied by the deceased partner's share.
Second, on the basis of average of past few years' profit. This method takes an average of profits over several years to account for fluctuations.
Third, on the basis of sales. The profit is calculated proportionately based on sales figures for the intervening period.
The formula for calculation is: Previous Year's Profit × Proportionate Period × Share of Deceased Partner. For example, if last year's profit is Rs. 1,00,000, the proportionate period is 3/12, and the partner's share is 4/10, then the share equals Rs. 1,00,//10 = Rs. 10,000.
Explanation
The textbook context clearly outlines three methods for computing the deceased partner's share of profit: (1) on the basis of last year's profit, (2) on the basis of average of past few years' profit, or (3) on the basis of sales. The context explains that since death can occur anytime during the year, and closing books is cumbersome, these alternative methods are used. The formula and example from the context (Champak's case) demonstrates the calculation: Previous Year's Profit × Proportionate Period × Share of Deceased Partner.