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 (A, B & C)
New ratio = 5:3:2 (A, B & C)
Sacrificed share = Old share - New share
Sacrifice of A = 2/5 - 5/10
= (4-5)/10
= -1/10 (as it is negative so it is gain)
Sacrifice of B = 2/5 - 3/10
= (4-3)/10
= 1/10
Sacrifice of C = 1/5 - 2/10
= (2-2)/10
= 0 (no sacrifice no gain)
Thus, B sacrifices and A gains.
Debit balance of Profit & Loss Account = ₹75,000
B's share = 75,000 x 1/10
= 7,500
As it is loss so B will compensate A. The journal entry for this is as follows-
B's Capital A/c Dr. 7,500
To A's Capital A/c 7,500