Target Exam

CUET

Subject

-- Accountancy Part A

Chapter

Reconstitution of Partnership Firm: Retirement and Death

Question:

If a partner needs to bring in additional capital due to deficiency after adjustment of capitals in case of retirement of a partner, the journal entry is:

Options:

Partner’s Capital A/c Dr.
    To Bank A/c

Bank A/c Dr.
    To Partner’s Capital A/c

Revaluation A/c Dr.
      To Cash A/c

Cash A/c Dr.
      To Partner’s Drawings A/c

Correct Answer:

Bank A/c Dr.
    To Partner’s Capital A/c

Explanation:

The correct answer is option 2- 
Bank A/c Dr.
    To Partner’s Capital A/c.

At the time of retirement or death of a partner, the remaining partners may decide to adjust their capital contributions in their profit sharing ratio. In such a situation, the sum of balances in the capitals of continuing partners may be treated as the total capital of the new firm, unless specified otherwise. Then, to ascertain the new capital of the continuing partners, the total capital of the firm is divided amongst the remaining partners as per the new profit sharing ratio, and the excess or deficiency of capital in the individual capital account’s may be worked out. Such excess or shortage shall be adjusted by withdrawal of contribution in cash, as the case may be, for which the following journal entries will be recorded.

(i) For excess capital withdrawn by the partner:
Partners’ Capital A/c
      To Cash / Bank A/c Dr.

(ii) For amount of capital to be brought in by the partner:
Cash / Bank A/c
      To Partners’ Capital A/c