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Illustrations · Illustration 26

Q.A, B and C are partners in a firm sharing profits in the ratio of 3:2:1. D is admitted into the firm for 1/4 share in profits, which he gets as 1/8 from A and 1/8 from B. The total capital of the firm is agreed upon as ₹1,20,000 and D is to bring in cash equivalent to 1/4 of this amount as his capital. The capitals of other partners are also to be adjusted in the ratio of their respective shares in profits. The capitals of A, B and C after all adjustments are ₹40,000, ₹35,000 and ₹30,000 respectively. Calculate the new capitals of A, B and C, and record the necessary journal entries.

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New profit-sharing ratio is 9:5:4:6. Required capitals: A ₹45,000, B ₹25,000, C ₹20,000, D ₹30,000. A brings in ₹5,000; B and C each withdraw ₹10,000; D brings in ₹30,000.

Concept

When the agreed total capital of the firm is specified, adjustment of capitals is straightforward: every partner's required capital is just their new share of that fixed total. The difference between a partner's already-adjusted capital and this required figure is either brought in (deficiency) or withdrawn (surplus). The textbook also notes that, if the partners agree, a surplus or deficiency can instead be routed through each old partner's current account rather than in cash — both treatments are shown below.

Working Notes

1. New profit-sharing ratio — D takes 1/8 from A and 1/8 from B; C is unaffected.

  • A = 3/6 − 1/8 = 12/24 − 3/24 = 9/24
  • B = 2/6 − 1/8 = 8/24 − 3/24 = 5/24
  • C = 1/6 = 4/24 (unchanged); D = 1/4 = 6/24
  • New ratio = 9:5:4:6

2. Required capitals (share of the agreed ₹1,20,000):

  • A = 9/24 × ₹1,20,000 = ₹45,000
  • B = 5/24 × ₹1,20,000 = ₹25,000
  • C = 4/24 × ₹1,20,000 = ₹20,000
  • D = 6/24 × ₹1,20,000 = ₹30,000

3. Adjustment — A (₹40,000 → ₹45,000) brings ₹5,000; B (₹35,000 → ₹25,000) withdraws ₹10,000; C (₹30,000 → ₹20,000) withdraws ₹10,000; D brings his full ₹30,000.

Solution

Journal entries (cash method)

DateParticularsL.F.Debit (₹)Credit (₹)
Cash A/c Dr.5,000
  To A's Capital A/c5,000
(Deficiency made good by additional amount brought in by A)
B's Capital A/c Dr.10,000
C's Capital A/c Dr.10,000
  To Cash A/c20,000
(Excess amounts withdrawn by B and C)
Cash A/c Dr.30,000
  To D's Capital A/c30,000
(Cash brought in by D as capital)

Alternatively, the old partners' adjustments may be routed through current accounts

DateParticularsL.F.Debit (₹)Credit (₹)
A's Current A/c Dr.5,000
  To A's Capital A/c5,000
(Deficiency in A's capital transferred to A's Current Account)
B's Capital A/c Dr.10,000
C's Capital A/c Dr.10,000
  To B's Current A/c10,000
  To C's Current A/c10,000
(Excess capital of B and C transferred to their current accounts)
✓Final answer

New capitals in the ratio 9:5:4:6: A ₹45,000, B ₹25,000, C ₹20,000, D ₹30,000. A brings in ₹5,000, B and C each withdraw ₹10,000, and D brings in ₹30,000 (or the old partners' differences are transferred to their current accounts).

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