Question

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

General Reserve and Profit and Loss Account balances are adjusted in the partners’ capital accounts:
 \[ {General Reserve Distribution: } rupee3,60,000 \times {(Old Ratio 5:3:2)} \] \[ {Profit and Loss Debit: } rupee1,80,000 { in the same ratio.} \] 

The adjustment entry: