A partnership firm with partners A, B and C sharing profits in the ratio of 2 : 2 :1. On 1st April, 2022 they decided to change the profit sharing ratio to 5 : 3 : 2. On that date debit balance of Profit & Loss Account was ₹75,000 appeared in the Balance Sheet and partners decided to pass an adjusting entry for it.
Which of the undermentioned options reflect the correct treatment for the above information?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- B's capital Account will be debited by ₹7,500 and A's capital Account will be credited by the same amount.
Old ratio = 2:2:1
New ratio = 5:3:2
Sacrifice of A = 2/5 - 5/10
= (4-5)/10
= -1/10 (gain)
Sacrifice of B = 2/5 - 3/10
= (4-3)/10
= 1/10
Sacrifice of C = 1/5 - 2/10
= (2-2)/10
= 0
Thus, C neither sacrifice nor gains. A gains and B sacrifice. So, B will compensate loss to A.
Profit and loss Dr. balance = ₹75,000
B share = 75,000 x 1/10
= 7,500
Journal entry for this-
B's Capital A/c Dr. ₹7,500
To A's Capital A/c ₹7,500
The following entries are passed for adjusting the accumulated losses and profits.
For profit - Gaining partner's capital A/c Dr. To Sacrificing partners capital A/c.
For loss - Sacrificing partners capital A/c. Dr. To Gaining partner's capital A/c
So, B's capital Account will be debited by ₹7,500 and A's capital Account will be credited by the same amount.