Question

Sita, Gita and Rita are partners sharing profits in the ratio of 4 : 3 : 2. From April 1, 2024, they decided to share the profit equally. On that date their books showed the following items:
% List of items Items:
General Reserves: ₹1,80,000
Workmen Compensation Reserve: ₹2,25,000
Profit & Loss Account (Dr.): ₹4,50,000
Record the necessary Journal Entries.

Hint:

When the profit-sharing ratio changes, you must adjust the reserves, capital accounts, and the Profit & Loss Account. Ensure that all adjustments are made based on the old and new profit-sharing ratios.

Answer 1

Step 1: Understand the situation.
The partners have decided to share the profit equally from April 1, 2024. To effect this change, we need to adjust the existing balances in the General Reserves, Workmen Compensation Reserve, and Profit & Loss Account, based on their old profit-sharing ratio (4:3:2) and the new ratio (1:1:1). The reserves and profit need to be adjusted to reflect the change in profit-sharing ratio.
Step 2: Journal Entries.
1. For the General Reserves: The General Reserves need to be divided according to the old profit-sharing ratio of 4:3:2. The total General Reserves amount is ₹1,80,000.
\[ \text{Sita’s Share} = \frac{4}{9} \times 1,80,000 = 80,000 \] \[ \text{Gita’s Share} = \frac{3}{9} \times 1,80,000 = 60,000 \] \[ \text{Rita’s Share} = \frac{2}{9} \times 1,80,000 = 40,000 \] Journal Entry: \[ \text{General Reserves A/c} \text{Dr.} \text{1,80,000} \text{To Sita's Capital A/c} \text{80,000}
\text{To Gita's Capital A/c} \text{60,000} \text{To Rita's Capital A/c} \text{40,000} \] 2. For the Workmen Compensation Reserve: Similarly, the Workmen Compensation Reserve needs to be divided according to the old profit-sharing ratio of 4:3:2. The total Workmen Compensation Reserve amount is ₹2,25,000.
\[ \text{Sita’s Share} = \frac{4}{9} \times 2,25,000 = 1,00,000 \] \[ \text{Gita’s Share} = \frac{3}{9} \times 2,25,000 = 75,000 \] \[ \text{Rita’s Share} = \frac{2}{9} \times 2,25,000 = 50,000 \] Journal Entry: \[ \text{Workmen Compensation Reserve A/c} \text{Dr.} \text{2,25,000} \text{To Sita's Capital A/c} \text{1,00,000}
\text{To Gita's Capital A/c} \text{75,000} \text{To Rita's Capital A/c} \text{50,000} \] 3. For the Profit & Loss Account (Dr.): The debit balance in the Profit & Loss Account of ₹4,50,000 needs to be adjusted. Since they are now sharing profits equally, the loss will be shared equally between Sita, Gita, and Rita.
\[ \text{Sita’s Share} = \frac{1}{3} \times 4,50,000 = 1,50,000 \] \[ \text{Gita’s Share} = \frac{1}{3} \times 4,50,000 = 1,50,000 \] \[ \text{Rita’s Share} = \frac{1}{3} \times 4,50,000 = 1,50,000 \] Journal Entry: \[ \text{Sita's Capital A/c} \text{Dr.} \text{1,50,000} \text{To Profit & Loss A/c} \text{1,50,000} \] \[ \text{Gita's Capital A/c} \text{Dr.} \text{1,50,000} \text{To Profit & Loss A/c} \text{1,50,000} \] \[ \text{Rita's Capital A/c} \text{Dr.} \text{1,50,000} \text{To Profit & Loss A/c} \text{1,50,000} \] Step 3: Conclusion.
These journal entries will adjust the partners' capital accounts to reflect the new profit-sharing ratio.