M and N are partners sharing profits in the ratio of 3:2. Their Balance Sheet as at 31st March 2024 showed: Capitals — M ₹80,000, N ₹60,000; General Reserve ₹20,000; Creditors ₹40,000; represented by Building ₹90,000, Machinery ₹50,000, Stock ₹30,000, Debtors ₹25,000 and Cash ₹5,

Question

M and N are partners sharing profits in the ratio of 3:2. Their Balance Sheet as at 31st March 2024 showed: Capitals — M ₹80,000, N ₹60,000; General Reserve ₹20,000; Creditors ₹40,000; represented by Building ₹90,000, Machinery ₹50,000, Stock ₹30,000, Debtors ₹25,000 and Cash ₹5,000. They admit O as a new partner for a 1/4th share on the following terms: (a) O brings in ₹50,000 as capital and ₹15,000 as premium for goodwill, both in cash; (b) Building is to be appreciated by 10%; (c) Machinery is to be depreciated by 10%; (d) Stock is to be revalued at ₹28,000; (e) the General Reserve is to be distributed to the old partners. Prepare the Revaluation Account and the Partners' Capital Accounts.

Accepted Answer

**Step 1 — New Ratio and Sacrificing Ratio**

O is given 1/4th share directly; remaining 3/4th is shared by M and N in their old ratio of 3:2 (nothing else stated).

M's new share = 3/5 × 3/4 = 9/20; N's new share = 2/5 × 3/4 = 6/20; O's share = 1/4 = 5/20

New Ratio M : N : O = 9 : 6 : 5

M's sacrifice = 3/5 − 9/20 = 12/20 − 9/20 = 3/20; N's sacrifice = 2/5 − 6/20 = 8/20 − 6/20 = 2/20

Sacrificing Ratio M : N = 3 : 2 (same as old ratio, as expected)

**Step 2 — Revaluation Account**

| Item | Effect | Amount (₹) |
|---|---|---|
| Building appreciated 10% of ₹90,000 | Increase (gain) | 9,000 |
| Machinery depreciated 10% of ₹50,000 | Decrease (loss) | 5,000 |
| Stock revalued from ₹30,000 to ₹28,000 | Decrease (loss) | 2,000 |

| Dr. Revaluation Account | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Machinery A/c | 5,000 | By Building A/c | 9,000 |
| To Stock A/c | 2,000 | | |
| To Profit transferred: | | | |
|   M's Capital A/c (3/5 of 2,000) | 1,200 | | |
|   N's Capital A/c (2/5 of 2,000) | 800 | | |
| **Total** | **9,000** | **Total** | **9,000** |

Profit on Revaluation = ₹9,000 − ₹7,000 = ₹2,000, shared 3:2 → M ₹1,200, N ₹800.

**Step 3 — Distribution of General Reserve**

General Reserve ₹20,000, shared 3:2 → M's share = ₹12,000; N's share = ₹8,000.

**Step 4 — Premium for Goodwill**

O brings ₹15,000 as premium for goodwill in cash, shared in the sacrificing ratio 3:2 → M's share = ₹9,000; N's share = ₹6,000.

**Step 5 — Partners' Capital Accounts**

| Dr. Capital Accounts | M (₹) | N (₹) | O (₹) | Cr. | M (₹) | N (₹) | O (₹) |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 1,02,200 | 74,800 | 50,000 | By Balance b/d | 80,000 | 60,000 | — |
| | | | | By General Reserve A/c | 12,000 | 8,000 | — |
| | | | | By Revaluation A/c (profit) | 1,200 | 800 | — |
| | | | | By Premium for Goodwill A/c | 9,000 | 6,000 | — |
| | | | | By Cash A/c (capital brought in) | — | — | 50,000 |
| **Total** | **1,02,200** | **74,800** | **50,000** | **Total** | **

Item	Effect	Amount (₹)
Building appreciated 10% of ₹90,000	Increase (gain)	9,000
Machinery depreciated 10% of ₹50,000	Decrease (loss)	5,000
Stock revalued from ₹30,000 to ₹28,000	Decrease (loss)	2,000

Dr. Revaluation Account	₹	Cr.	₹
To Machinery A/c	5,000	By Building A/c	9,000
To Stock A/c	2,000
To Profit transferred:
M's Capital A/c (3/5 of 2,000)	1,200
N's Capital A/c (2/5 of 2,000)	800
Total	9,000	Total	9,000

Dr. Capital Accounts	M (₹)	N (₹)	O (₹)	Cr.	M (₹)	N (₹)	O (₹)
To Balance c/d	1,02,200	74,800	50,000	By Balance b/d	80,000	60,000	—
				By General Reserve A/c	12,000	8,000	—
				By Revaluation A/c (profit)	1,200	800	—
				By Premium for Goodwill A/c	9,000	6,000	—
				By Cash A/c (capital brought in)	—	—	50,000
Total	1,02,200	74,800	50,000	Total	1,02,200	74,800	50,000

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