Question

Bhawana and Vedika were partners in a firm sharing profits and losses in the ratio of 5:4. From 1st April, 2024 they decided to share future profits and losses in the ratio of 4:5. On this date, their balance sheet showed a debit balance of Rs 1,80,000 in Profit and Loss Account and a balance of Rs 6,30,000 in General Reserve. Partners decided to write off debit balance in Profit and Loss Account but decided not to distribute the General Reserve.
Pass necessary journal entries for the above transactions on the reconstitution of the firm. Show your workings clearly.

Hint:

On change in PSR: 1. Existing accumulated profits/losses MUST be distributed/written off in the OLD ratio unless partners decide otherwise. 2. If partners decide NOT to distribute reserves/profits, pass an adjustment entry: Gaining Partner(s) Dr. To Sacrificing Partner(s) Cr. with the net effect amount (Total Reserve/Profit x Gain/Sacrifice Share).

Answer 1

Workings: Option (A) Treatment of Accumulated Loss (Debit Balance in P A/c): The existing accumulated loss (Rs 1,80,000) must be written off by debiting the old partners' capital accounts in their old profit-sharing ratio (5:4). \begin{itemize} (B) Bhawana's share of loss = \( 1,80,000 \times \frac{5}{9} = Rs 1,00,000 \) % Option (C) Vedika's share of loss = \( 1,80,000 \times \frac{4}{9} = Rs 80,000 \) \end{itemize} (D) Treatment of General Reserve (Not Distributed): Since the partners decided *not* to distribute the General Reserve (Rs 6,30,000), its effect needs to be adjusted through partners' capital accounts based on the gaining/sacrificing ratio due to the change in PSR. \begin{itemize} (E) Old Ratio (Bhawana : Vedika) = 5:4 (\( \frac{5}{9} : \frac{4}{9} \)) (F) New Ratio (Bhawana : Vedika) = 4:5 (\( \frac{4}{9} : \frac{5}{9} \)) (G) Sacrifice/(Gain) = Old Share - New Share (H) Bhawana's Change = \( \frac{5}{9} - \frac{4}{9} = +\frac{1}{9} \) (Sacrifice) (I) Vedika's Change = \( \frac{4}{9} - \frac{5}{9} = -\frac{1}{9} \) (Gain) (J) Adjustment Amount = General Reserve \( \times \) Sacrificed/Gained Share (K) Amount = \( 6,30,000 \times \frac{1}{9} = Rs 70,000 \) (L) Entry: Gaining Partner (Vedika) Dr. To Sacrificing Partner (Bhawana) Cr. \end{itemize} Journal Entries:
\vspace{0.2cm} \begin{tabularx}{\textwidth}{X r r} % Use 'r' for right-aligned columns \toprule Particulars & Dr. (Rs) & Cr. (Rs)
\midrule \multicolumn{3}{l}{\textit{(i) For writing off accumulated loss:}}
Bhawana's Capital A/c \dotfill & 1,00,000 &
Vedika's Capital A/c \dotfill & 80,000 &
\quad To Profit and Loss A/c \dotfill & & 1,80,000
\textit{(Being accumulated loss written off in old ratio 5:4)} & &
\midrule \multicolumn{3}{l}{\textit{(ii) For adjustment of General Reserve due to change in PSR:}}
Vedika's Capital A/c \dotfill & 70,000 &
\quad To Bhawana's Capital A/c \dotfill & & 70,000
\textit{(Being adjustment entry passed for General Reserve on change in PSR)} & &
\bottomrule \end{tabularx} \vspace{0.2cm}