Arrange the following steps in the order of the accounting treatment in case of death of a partner.
A. Adjustment of capital account of the existing partner.
B. Transfer of share of goodwill to deceased partner's capital account.
C. Transfer of amount from deceased partner's capital account to executor's account.
D. Calculation of New Profit Ratio and Sacrificing Ratio.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → D, B, A, C
Each step needs the one before it, so the order is fixed by what has to be known first.
- (D) The ratio is settled first. Until it is known how the deceased partner’s share is taken over, nothing can be divided.
- (B) His share of goodwill is then credited to his capital account, charged to the partners who gained his share.
- (A) The existing partners’ capital accounts are adjusted next, once goodwill, revaluation and reserves have all been put through.
- (C) What remains in the deceased partner’s capital account is transferred to his executor’s account, which is the last thing that can happen, because the balance is not known until everything else is done.
Note: It seems that there is a mistake in the original NTA paper, which prints step D as “Calculation of New Profit Ratio and Sacrificing Ratio” when it should read gaining ratio. On the death or retirement of a partner the continuing partners take over the outgoing partner’s share, so what is computed is the ratio in which they gain; a sacrificing ratio arises when a partner is admitted. Read step D as the gaining ratio and the sequence is the same.