Question

Mahesh, Ramesh, and Naresh were partners in a firm sharing profits in the ratio of 5 : 3 : 2. From 1^st April, 2023, they decided to share profits equally.
On that date, there was a balance of Rs.3,60,000 in General Reserve and a debit balance of Rs.1,80,000 in the Profit and Loss Account.
Pass a single adjustment Journal entry for the above on account of the change in the profit-sharing ratio.

Hint:

Always adjust reserve and loss balances proportionate to the old and new ratios when the profit-sharing ratio changes.

Answer 1

The profit-sharing ratio has been revised from 5:3:2 to an equal 1:1:1 distribution. Adjustments for General Reserve and Profit and Loss Account balances are reflected in the partners’ capital accounts:\[\text{General Reserve Distribution: } Rs.3,60,000 \times \text{(Old Ratio 5:3:2)}\]\[\text{Profit and Loss Debit: } Rs.1,80,000 \text{ in the same ratio.}\]The resulting adjustment entry is as follows:\[\text{Journal Entry:}\]\[\begin{array}{|l|c|c|}\hline\textbf{Particulars} & \textbf{Dr. Amount (Rs.)} & \textbf{Cr. Amount (Rs.)} \\\hline\text{Naresh’s Capital A/c Dr.} & 60,000 & \\\text{To Mahesh’s Capital A/c} & & 50,000 \\\text{To Ramesh’s Capital A/c} & & 10,000 \\\hline\end{array}\]