Adjustment Regarding Capitals of Partners

Adjustment Regarding Capitals of Partners :

It is often agreed that after the admission of a new partner, capitals of all the partners should be in proportion to their respective shares in profit. The basis may be the amount of capital brought in by the new partner or the new partner himself may be required to bring in capital equal to his share in the firm. If the new partner’s capital is given, the total capital of the firm should be ascertained on that basis. Then, the capital required for each one of the old partners should be ascertained and it should be compared with the actual balances in the accounts of the partners concerned, adjustments may then be made in cash or through current accounts to bring the balances of capital accounts of all the old partners to the desired figures. Suppose, C brings in Rs.10,000 for 1/5th share of profits. Total capital of the firm should be Rs.10,000 x 5 or Rs.50,000. If A and B are to share profits as to A 1/2 and B 3/10

then A’s capital account should show a balance of Rs.50,000 x 1/2 orRs.25,000 and B’s capital should show a balance of Rs.50,000 x 3/10 or Rs.15,000. If A’s capital account shows a balance of Rs.24,000 and the capital account of B shows a balance of ` 16,500, A will bring in Rs.1,000 and B will withdraw Rs.1,500.
Alternatively, the new partner may be required to bring capital on the basis of capital of old partners.

Suppose, the capital accounts A and B after all adjustments are Rs.32,000 and Rs.18,000 respectively and C is admitted as a new partner to whom 1/5th share of profits is given. Then

Illustration:
On 31st March, 2013 the following was the Balance Sheet of A and B who were equal partners:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	8,940	Cash in hand	950
General Reserve	10,000	Stock	32,710
A’s Capital Account	35,000	Debtors 11000
B’s Capital Account	20,000	Less: Provision for Bad Debts 220 ,	10,780
		Furniture and Fittings	9,500
	_________	Land and Buildings	20,000
	73,940		73,940

On 1st April 2013, C was admitted as a new partner on the following conditions:
(i) A, B and C share profits and losses in the ratio 4:3:2 respectively.
(ii) Prior to C’s admission appreciation of Rs.15,000 in the value of land and buildings would be recorded
and provision for bad debts would be brought upto Rs. 820.
(iii) C would bring Rs.20,000 in cash as his capital.
Pass journal entries to record the abovementioned transactions and show the balance sheet of firm immediately after C’s admission.

Solution :

Journal Entries

Dr. Cr.

Particulars	Rs	Rs.
General Reserve Dr.	10,000
To A’s Capital Account		5,000
To B’s Capital Account		5,000
(Transfer of general reserve to old partners in old profit sharing ratio)

Land and Building Account Dr.	15,000
To Revaluation Account		15,000
(Appreciation in the value of land and buildings as agreed on admission of C as a new partner)._____

Revaluation Account Dr.	600
To Provision for Bad Debts		600
(Increase in provision for bad Debts by ` 600)_______
	14,400
Revaluation Account Dr.		7,200
To A’s Capital Account		7,200
To B’s Capital Account
(Transfer of net profit on revaluation to old Partners’ capital accounts in old profits sharing ratio)_
	20,000
Bank Dr.		20,000
To C’s Capital Account
(Amount brought in by C as in his capital)_____________

Balance Sheet of A, B and C as on 1st April, 2013

Liabilities		Assets
Sundry Creditors	8,940	Cash	20,950
A’s Capital Account	47,200	Stock	32,710
B’s Capital Account	32,200	Debtors 11,000
C’s Capital Account	20,000	Less: Provision for Bad Debts , 820	10,180
		Furniture and Fittings	9,500
	————-	Land and Buildings	35,000
	1,08,340		1,08,340

Revaluation Account
Dr. Cr.

Liabilities	Rs.	Assets	Rs.
To Provision for Bad Debts	600	By Land and Buildings	15,000
To A’s Capital Account	7,200
To B’s Capital Account	7,200
	15,000		15,000

Dr. Capital Accounts Cr.

*Particulars*	A *Rs.*	B *Rs.*	C *Rs.*	*Particulars*	A *Rs.*	B *Rs.*	C Rs.
To Balance c/d	47,200	32,200	20,000	By Balance b/fd	35,000	20,000
				By General	5,000	5,000
				Reserve
				By Revaluation	7,200	7,200
				By Cash			20,000
	47,200	32,200	20,000		47,200	32,200	20,000
				By Balance b/d	47,200	32,200	20,000

If the values of assets and liabilities were not to be changed, the following would have been the solution:

Journal Entries

*Particulars*	*Dr. (Rs.)*	*Cr. (Rs)*
General Reserve Dr.	10,000
To A’s Capital Account		5,000
To B’s Capital Account		5,000
(Transfer of general reserve to old partners in old profit sharing ratio)
Memorandum Revaluation Account Dr.	14,400
To A’s Capital Account		7,200
To A’s Capital Account		7,200
(Record of profit on revaluation)
Bank Dr.	20,000
To C’s Account		20,000
(Amount brought in by C as his capital)
A’s Capital Account Dr.	6,400
B’s Capital Account Dr.	4,800
C’s Capital Account Dr.	3,200
To Memorandum Revaluation Account		14,400
(Transfer of Memorandum Revaluation Account after C’s admission to all the partners’ capital accounts in the new profit sharing ratio)

Balance Sheet of A, B and C on 1st April, 2013

*Liabilities*	*Rs.*	*Assets*	*Rs.*
Sundry Creditors	8,940	Cash	20,950
A’s Capital account	40,800	Stock	32,710
B’s Capital Account	27,400	Debtors 11,000
C’s Capital Account	16,800	*Less:* Provision
		for Bad Debts 220	10,780
		Furniture and Fittings	9,500
	________	Land and Buildings	20,000
	93,940		93,940

Working Notes:

Memorandum Revaluation Account

Dr. Cr.


*Particulars*	Rs.	*Particulars*	Rs.
To A’s Capital Account	7,200	By A’s Capital account	6,400
To B’s Capital Account	7,200	By B’s Capital Account	4,800
	________	By C’s Capital Account	3,200
	14.400		14.400

Dr. Capital Accounts Cr.

*Particulars*	A *Rs()*	B (Rs)	C (Rs)	*Particulars*	A *(Rs)*	B (Rs)	C (Rs)
To Memorandum	6,400	4,800	3,200	By Balance b/fd	35,000	20,000
Revaluation A/c
To Balance c/d	40,800	27,400	16,800	By General	5,000	5,000
				Reserve
				By Revaluation	7,200	7,200
				By Bank			20,000
	47,200	32,200	20,000		47,200	32,200	20,000
				By Balance b/d	40,800	27,400	16,800

Illustration :

On 31st March, 2013 the following was the balance sheet of P and Q who were carrying on business in partnership sharing profits and losses in the ratio of 5:3 respectively.

*Liabilities*	*Rs.*	*Assets*	*Rs.*
*Sundry Creditors*	*10,900*	*Furniture and Fittings*	*15,000*
*Capital Accounts*		*Stock*	*48,000*
P	*45,000*	*Sundry Debtors*	*16,500*
Q	*27,000*	*Cash*	*3 400*
	*82,900*		*82,900*

On 1st April, 2013 R is admitted to the firm as a new partner, the new profit sharing ratio among P, Q and R is agreed upon as 7:5:4 respectively. R brings in ` 24,000 as his capital. R’s share of goodwill is fixed at RS.5,000.

Show journal entries and balance sheet immediately after R’s admission in each of the following cases:

(a) R brings cash for his share of goodwill and the old partners withdraw half of the amounts credited to their accounts for goodwill brought in by R.

(b) R does not bring anything by way of his share of goodwill.

Solution:

Case (a):

Journal Entries

Particulars	Dr. (Rs.)	Cr. (Rs.)
Bank Dr.	24,000
To R’s Capital A/c		24,000
(Amount brought in by R as his capital)

Bank Dr.	5,000
To P’s Capital Account		3,750
To Q’s Capital Account		1,250

P’s Capital Account Dr.	1,875
Q’s Capital Account Dr.	625
To Bank		2,500
(Half of the amount of goodwill credited to old partners withdrawn by them in cash)

Balance Sheet of P, Q and R as on 1st April, 2013

Liabilities	Rs.	assets	Rs.
Sundry Creditors	10,900	Furniture and Fittings	15,000
Capital Accounts		Stock	48,000
P	46,875	Sundry Debtors	16,500
Q	27,625	Bank	29,900
R	24,000		_______
	1,09,400		1,09,400

Case (b):

Journal Entries

Particulars	Rs.	Rs.
Bank Dr.	24,000
To R’s Capital Account		24,000
(Capital brought in by R)
R’s Capital Account Dr.	5,000
To P’s Capital Account		3,750
To Q’s Capital Account		1,250
(Being R’s share of goodwill credited to old partners’ capital account in the sacrificing ratio on his admission, credit being given to old partners in their ratio of sacrifice).

Balance Sheet of P,Q and R as on 1st April, 2013

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	10,900	Furniture and Fittings	15,000
P	48,750	Stock	48,000
Q	28,250	Sundry Debtors	16,500
R	19,000	Cash	27,400
	1,06,900		1,06,900

Case (c):

Journal Entries

Particulars	Rs..	Rs..
Bank Dr.	24,000
To R’s Capital Account		24,000
(Capital brought in by R)
Bank Dr.	3,000
To P’s Capital Account		2,250
To Q’s Capital Account		750
(Being the amount of goodwill brought in by R credited to old partners in sacrificing ratio)

R’s Capital Account Dr.	2,000
To P’s Capital Account		1,500
To Q’s Capital Account		500
(Being portion of R’s share of goodwill adjusted through the capital accounts by debiting new partner’s capital account and credited to old partners’ capital accounts in the sacrificing ratio.)

Balance Sheet of P, Q and R
as on 1st April, 2013

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	10,900	Furniture and Fittings	15,000
Capital Accounts		Stock	48,000
P	48,750	Sundry Debtors	16,500
Q	28,250	Bank	30,400
R	22,000		______
	1,09,900		1,09,900

Illustration:
A and B sharing profits in proportion of three-fourth and one-fourth showed the following as their Balance Sheet as on 31st March, 2013:

Liabilities	Rs.	Assets	Rs.
Creditors	375,000	Cash at Bank	2,25,000
General Reserve	40,000	Bills Receivable	30,000
Capital Account:		Debtors	1,60,000
A `3,00,000		Stock	2,00,000
B `1,60,000		Office Furniture	10,000
	4,60,000	Land and Buildings	2,50,000
	8,75,000		8,75,000

They admit C into partnership on 1st April, 2013 on the following terms:

(1) That C pays Rs.10,000 as his capital for a fifth share in the future profits.

(2) That goodwill of the new firm is valued at ` 20,000 and C brings his share of goodwill in cash.

(3) That a stock and furniture be reduced by 10% and a 5% provision for doubtful debts is created on debtors.

(4) That the value of land and buildings be appreciated by 20%.

(5) That the capital accounts of all the partners be re-adjusted on the basis of their profits-sharing arrangement and any additional amount be immediately withdrawn by them.
Pass the journal entries; prepare the Profit and Loss Adjustment Account (Revaluation Account), Partners’ capital accounts and the opening Balance Sheet of the new firm.

Particulars	Rs.	Rs.
Profit and Loss Adjustment Account Dr.	29,000
To Stock		20,000
To Office Furniture		1,000
To Provision for doubtful debts		8,000
(Adjustment for writing down the values of assets)

Land and Buildings Account Dr.	50,000
To Profit and Loss Adjustment Account		50,000
(Adjustment for appreciation in the value of Land and Buildings)

General Reserve Account Dr.	40,000
To A’s capital Account		30,000
To B’s Capital Account		10,000
(Transfer of General Reserve to partners’ capital accounts in the profit sharing ratio)

Profit and Loss Adjustment Account Dr.	21,000
To A’s Capital Account		15,750
To B’s Capital Account		5,250
(Transfer of profit arising from adjustments to partners’ capital accounts in their profit-sharing proportions)

Bank Dr.	1,40,000
To C’s Capital Account		1,40,000
(Amount brought in by C as his share capital and ¼th share of goodwill)

C’s Capital Account Dr.	40,000
To A’s Capital Account		30,000
To B’s Capital Account		10,000
(Share of goodwill brought in by the incoming partner credited to old partners in their sacrificing ratio)

A’s Capital Account Dr.	75,750
To Bank		75,750
(Withdrawal of excess of capital over profitsharing proportion)

B’s Capital Account Dr.	85,250
To Bank		85,250
(Withdrawal of excess of capital over his profit sharing proportion)

Profit and Loss Adjustment account

Dr. Cr.

Particulars	Rs.	Particulars	Rs.
To Stock	20,000	By Land and Buildings	5,000
To Office Furniture	1,000
To Provision for Doubtful Debts	8,000
To Transfer of Profits of Capital
Accounts: Rs.
A 3/4th 15,750
B 1/4th 5,250	21,000		_________
	50,000		50,000

Dr. A’s Capital Account Cr.

*Particulars*	*Rs.*	*Particulars*	Rs.
To Bank	75,750	By Balance b/fd	3,00,000
To Balance c/d	3,00,000	By General Reserve	30,000
		By Profit and Loss
		Adjustment A/c	15,750
	________	By C’s Capital A/c	30,000
	3 75 750		3 75 750
		By Balance b/d	3,00,000

Dr. . B’s Capital Account Cr.

*Particulars*	*Rs.*	*Particulars*	Rs.
To Bank	85,250	By Balance b/fd	1,60,000
To Balance c/d	1,00,000	By General Reserve	10,000
		By Profit and Loss
		Adjustment A/c	5,250
		By C’s Capital A/c	10,000
	1 ,85 250		1 85 250
		By Balance b/d	1,00,000

C’s Capital Account

Dr. Cr.

*Particulars*	*Rs.*	*Particulars*	Rs.
To A’s Capital A/c	30,000	By Bank	1,40,000
To B’s Capital A/c	10,000
To Balance c/d	1 00 000
	1 40 000		1 40 000
		By Balance b/d	1,00,000

Balance Sheet of A, B and C
as at 1st April, 2013

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Sundry Creditors		3,75,000	Cash at Bank		2,04,000
Capital Account:			Bills Receivable		30,000
A	30,0,000		Office Furniture		9,000
B	1,00,000		Sundry Debtors	1,60,000
C	1 00 000	5,00,000	Less: Provision for
			Doubtful Debts
			@ 5%	8,000	1,52,000
			Stock		1,80,000
		_________	Land and Building		3 00 000
		8 75 000			8 75 000

Note: from the above balance sheet, it is clear that the capitals of the partners now bear the same proportions as their profit sharing arrangement.

Ajay and Binoy are partners in a firm sharing profits and losses in the ratio of 2:1 respectively. On 31^st March, 2013 their balance sheet stood as follows:

*Liabilities*	*(Z)*	*Assets*	*(Z)*
Bills payable	6,000	Cash at bank	90,000
Sundry creditors	90,000	Bills receivable	20,000
General reserve	42,000	Sundry debtors	1,00,000
Ajay’s capital	2,82,000	Stock	1,60,000
Binoy’s capital	2,40,000	Furniture	40,000
	_________	Machinery	2,50,000
	6,60,000		6,60,000

On 1^st April 2013, a new partner Harry is admitted into partnership on the following terms:

N That Harry brings in cash r 60,000 as goodwill for his one-third share in future profits.

That Harry brings such an amount that his capital will be one-third of total capital of the new firm.
That the value of stock be raised to Z 1,68,000.
That furniture and machinery be depreciated by 5% and 10% respectively.
That a provision for doubtful debts be created at 5% on sundry debtors.
That the capital accounts of the partners be re-adjusted on the basis of their profit sharing ratio through their current accounts.

Prepare the necessary ledger accounts and the opening balance sheet of the new firm.

Solution:

Revaluation Account

Dr. Cr.

Date	Particulars	Rs.	Particulars	Rs.
	To Furniture A/c	2,000	By Stock A/c	8,000
	To Machinery A/c	25,000	By Ajay’s Capital A/c(2/3 loss)	16,000
	To Provision for doubtful debts A/c	5,000	By Binoy’s Capital A/c (1/3 loss)	8,000
		32,000		32,000

Capital Accounts
Dr. Cr.

Particulars	Ajay	Binoy	Harry	Particulars	Ajay	Binoy	Harry
To Revaluation A/c (Loss)	16,000	8,000	–	By Balance b/fd	2,82,000	2,40,000	–
To Ajay’s Capital A/c (Goodwill)	–	–	40,000	By General Reserve	28,000	14,000
To Binoy’s Capital A/c (Goodwill)	–	–	20,000	By Bank (Goodwill)	–	–	60,000
To Binoy’s Current A/c	–	66,000	–	By Harry’s Capital A/c (Goodwill)	40,000	20,000	–
To Balance c/d	4,00,000	2,00,000	3,00,000	By Bank	–	–	3,00,000
				By Ajay’s Current A/c	66,000	–	–
	4,16,000	2,74,000	3,60,000		4,16,000	2,74,000	3,60,000

Balance Sheet of Ajay, Binoy and Harry
as on 1st April, 2013

Liabilities	Rs.	Assets	Rs.
Bills Payable	6,000	Cash at Bank	4,50,000
Sundry Creditors	90,000	Bills Receivables `	20,000
Binoy’s Current A/c	66,000	Sundry Debtors 1,00,000
Ajay’s Capital A/c	4,00,000	Less : Provision for
Binoy’s Capital A/c	2,00,000	Doubtful Debts 5,000	95,000
Harry’s Capital A/c	3,00,000	Stock	1,68,000
		Furniture	38,000
		Machinery	2,25,000
	________	Ajay’s Current Account	__66,000
	10,62,000		10,62,000

Working Notes:
(i) Calculation of Harry’s Capital
Total capital:
Ajay’s capital: Rs.(2,82,000 + 28,000 + 40,000 – 16,000) = Rs.3,34,000
Binoy’s capital: Rs.(2,40,000 + 14,000 + 20,000 – 8,000) = Rs.2,66,000
Total capital of Ajay and Binoy before Harry’s Admission = Rs.6,00,000

This capital is for 1-(1/3) = 2/3 share
So total capital of new firm (Rs.6,00,000 x 3/2) = Rs.9,00,000
Harry’s Capital = 1/3 x Rs.9, 00,000 = Rs.3,00,000

(ii) Calculation of new profit sharing ratio and capital of Ajay and Binoy:
Harry’s share = 1/3
Balance = 1-(1/3) = 2/3 to be shared by Ajay and Binoy
Ajay’s new share = 2/3 x 2/3 = 4/9
Binoy’s new share = 2/3 x 1/3 = 2/9
New profit share ratio = 4 : 2 : 3
Ajay’s capital in new firm = 4/9 x Rs.9,00,000 = Rs.4,00,000
Binoy’s capital in new firm = 2/9 x Rs.9,00,000 = Rs.2,00,000
Adjustment of capitals is made through partners’ current accounts
Sacrifice by Ajay = (2/3) – (4/9) = 2/9
Sacrifice by Binoy = (1/3) – (2/9) = 1/9
Sacrificing ratio = 2 : 1
So goodwill is distributed between Ajay and Binoy in the ratio of 2 : 1 respectively.

Illustration :
Bansal and Chandar were partners in a firm sharing profits and losses equally. Their balance sheet as on 31st March, 2013 was as follows:

Liabilities	Rs.	Rs	Assets	Rs.
Sundry Creditors		1,26,000	Cash at Bank	14,000
General Reserve		70,000	Debtors	1,40,000
Capital Accounts:			Stock	1,68,000
Bansal	2,10,000		Furniture	28,000
Chander	1,68,000	3,78,000	Buildings	2,24,000
		5,74,000		5,74,000

Sagar was admitted as a partner and was given one-fourth share of profits on the following terms:

– He would bring Rs.2,10,000 in cash as his capital.

– His share of goodwill was valued at Rs.70,000 but he was unable to bring it in cash.

– Stock and furniture be depreciation by 10%.

– A provision of 5% on debtors be created for doubtful debts.

– An amount of Rs.14,000 included in creditors not to be treated as a liability.

– A provision of Rs.7,000 be created against bills discounted.

– The buildings be treated as worth Rs.2,80,000.

It was agreed that except cash, the other assets and liabilities were to be shown at old figures in the balance sheet. Give journal entries to record the transactions and prepare Memorandum Revaluation Account and capital accounts of the partners. Also prepare the balance sheet after admission of Sagar.

Solution:

Journal Entries

Particulars	Rs.	Rs.
General Reserve Account Dr.	70,000
To Bansal’s Capital Account		35,000
To Chander’s Capital Account		35,000
(The transfer of general reserve to capital accounts of old partners in the old ratio)

Bank Dr.	2,10,000
To Sagar’s Capital Account		2,10,000
(The Amount brought in by Sagar as his capital)

Sagar’s Capital Account Dr.	70,000
To Bansal’s Capital Account		35,000
To Chander’s Capital Account		35,000
(Sagar’s share of goodwill credited to old partners’ capital accounts in the ratio of sacrifice which is 1: 1)

Memorandum Revaluation A/c Dr.	36,400
To Bansal’s Capital Account		18,200
To Chander’s Capital Account		18,200
(Profit on revaluation credited to the old partners in the old ratio)

Bansal’s Capital Account Dr.	13,650
Chander’s Capital Account Dr.	13,650
Sagar’s Capital Account Dr.	9,100
To Memorandum Revaluation Account		36,400
(Memorandum Revaluation Account closed by debiting all the partners in the new profit sharing ratio)

Dr. Memorandum Revaluation Account Cr.

Particulars	Rs.	Particulars	Rs.
To Provision for Doubtful Debts	7,000	By Buildings	56,000
To Stock	16,800	By Sundry Creditors	14,000
To Furniture	2,800
To Provision for Bills Discounted	7,000
To Profit transferred to : Rs.
Bansal ½ 18,200
Chander ½ 18,200	36,400		________
	70,000		70,000
To Buildings	56,000	By Provision for Doubtful Debts	7,000
To Sundry Creditors	14,000	By Stock	16,800
		By Furniture	2,800

	By Provision for Bills Discounted	7,000
	By Loss transferred to: Rs
	Bansal (3/8) 13,650
	Chander (3/8) 13,650
	Sagar(1/4) 9,100	36,400
70,000		70,000

Dr. Capital Accounts Cr.

*Particulars*	Bansal (Rs.)	Chander (Rs.)	Sagar (Rs.)	*Particulars*	Bansal (Rs.)	Chander (Rs.)	Sagar (Rs.)
To Bansal’s				By Balance
Capital A/c	—	—	35,000	b/fd	2,10,000	1,68,000	—
To Chander’s				By General
Capital A/c	—	—	35,000	Reserve	35,000	35,000	—
To				By Bank	—	—	2,10,000
Memorandum				By Sagar’s
Revaluation				Capital A/c	35,000	35,000	—
A/c	13,650	13,650	9,100	By
To Balance c/d				Memorandum Revaluation
	2 84 550	2 42 550	1 30 900	A/c	18,200	18,200	—
	2,98,200	2 56 200	2 10 000		2 98 005	2 56 200	2 10 000
				By Balance
				b/d	2,84,550	2,42,550	1,30,900

Balance Sheet of Mr. Bansal, Chander and Sagar as on 31^st March, 2013

*Liabilities*	*Rs.*	*Assets*	*Rs.*
To Sundry Creditors	1,26,000	By Cash at Bank	2,24,000
To Capital Accounts: Rs.		By Debtors	1,40,000
Bansal 2,84,550		By Stock	1,68,000
Chander 2,42,550		By Furniture	28,000
Sagar 1 30 900	6 58 000	By Buildings	2 24 000
	7 84 000		7 84 000

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