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Calculation Of Profit

If the death of a partner occurs on any day during the year, the executors of the deceased partner will also be entitled to the share of profits earned by the firm from the beginning of the year till the date of his death. Such profit may be ascertained from any of the following methods:
 

(A)               On Time Basis
 

(B)               On Turnover or Sales Basis
 

On Time Basis

 

In this method, we have to take into consideration the profit of the last year and the time for which he remained a partner during the current year. On the basis of last year’s profit we shall calculate the proportionate profit upto the date of death and then calculate the deceased partner’s share:

 

Example
Ram, Manohar and Joshi were partners in a firm. Joshi died on 28th February, 1994. His share of profit from the closure of the last accounting year till the date of death was to be calculated on the basis of the average of three completed years of profits before death. Profits for 1991, 1992 and 1993 were Rs. 7,000, Rs. 8,000 and Rs. 9,000 respectively.
Calculate Joshi’s share of profit till his death and pass the necessary Journal entry for the same.
Average profit  = Rs. 8,000. Two month’s profit, i.e. from 1st January, 1994 to 28th February, 1994 = Rs. 1,333.33  share of Joshi till his death = 

 

 

Turnover Or Sales Basis
 

In this method, we have to take into consideration the profit and the total sales of the last year. Thereafter, the profit of the current year is estimated on the basis of the sales for the last year and the sales upto the date of death.

A, B and C are sharing profits in the ratio of 3: 2: 1. C dies on 31st March, 1997. Accounts are closed on 31st December every year. Sales for the year 1996 amounted to Rs. 6,00,000. Sales from 1st January, 1997 to 31st March, 1997 amounted to Rs. 2,40,000. The profit for the year 1996 amounted to Rs. 30,000.

Calculate the deceased partner’s share in the current year’s profits.

Profit from 1st January, 1997 to 31st March, 1997 on the basis of sales :

If sales are Rs.6,00,000, profit is Rs.30,000

If sales are Rs. 2,40,000 profit will be  C’s share will be

Questions

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