When a Partner dies in the Middle of the Year, which accounting adjustment / calculation is not done for the intervening period?
When a Partner dies in the Middle of the Year, which accounting adjustment / calculation is not done for the intervening period?
Solution
Interest on capital, interest on drawings and the estimated share of profit or loss are all time based items and must be computed only for the period from the last balance sheet date to the date of death. Goodwill, in contrast, is valued for the firm as a whole and the deceased partner's share of it is credited in full, so it is not an intervening period calculation.
Interest on capital, interest on drawings, share of profit: these are all calculated for the intervening period, meaning they depend on how much time has passed since the last accounts (e.g., if a partner dies 4 months into the year, these are calculated only for those 4 months, on a time basis).
Goodwill: this is calculated at the time of death, but not for the intervening period, since goodwill isn't earned or accrued proportionally over time within the year. It's the deceased partner's share of the firm's goodwill value (based on an agreed method like average profits, super profits, etc.), and it's credited to compensate them for their share in the firm's reputation and future earning capacity, not for time elapsed in the current year.
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