Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in the ratio of 3:3:2. They decided to share the profits equally w.e.f. April 1, 2015. Their Balance Sheet as on March 31, 2016 was as follows:
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Sundry Creditors | 1,50,000 | Cash at Bank | 40,000 |
| General Reserve | 80,000 | Bills Receivable | 50,000 |
| Partner's Loan: Dinesh 40,000; Ramesh 30,000 | 70,000 | Sundry Debtors | 60,000 |
| Partners Capital: Dinesh 1,00,000; Ramesh 80,000; Suresh 70,000 | 2,50,000 | Stock | 1,20,000 |
| Fixed Assets | 2,80,000 | ||
| Total | 5,50,000 | Total | 5,50,000 |
It was also decided that:
- The fixed assets should be valued at ₹3,31,000.
- A provision of 5% on sundry debtors be made for doubtful debts.
- The goodwill of the firm at this date be valued at 4½ years purchase of the average net profits of last five years which were ₹14,000; ₹17,000; ₹20,000; ₹22,000 and ₹27,000 respectively.
- The value of stock be reduced to ₹1,12,000.
- Goodwill was not to appear in the books.
Pass the necessary journal entries and prepare the revised Balance Sheet of the firm.
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Start your 14-day free trial to unlock the full solution →Dinesh and Ramesh each sacrifice 1/24, Suresh gains 2/24. Goodwill of firm ₹90,000, so Suresh pays ₹7,500 and Dinesh and Ramesh receive ₹3,750 each through capital accounts. Revaluation profit ₹40,000 and General Reserve ₹80,000 are shared in old ratio 3:3:2. Closing capitals: Dinesh ₹1,48,750, Ramesh ₹1,28,750, Suresh ₹92,500. Balance Sheet totals ₹5,90,000.
Concept
A change in profit-sharing ratio among existing partners is treated exactly like an admission — revaluation, transfer of reserves in the old ratio and a goodwill adjustment — except that no partner joins or brings cash. Because goodwill is not to appear in the books, only the net adjustment is passed: the gaining partner's capital is debited and the sacrificing partners' capitals are credited, in the gaining/sacrificing ratio. This is a standard CBSE Class 12 Accountancy change-in-profit-sharing-ratio problem.
Working Notes
1. Sacrifice / gain — compare old 3:3:2 (as /24: 9/24, 9/24, 6/24) with new equal (8/24 each):
- Dinesh: 9/24 − 8/24 = 1/24 (sacrifice)
- Ramesh: 9/24 − 8/24 = 1/24 (sacrifice)
- Suresh: 6/24 − 8/24 = −2/24 (gain 2/24)
2. Goodwill — Total profit = 14,000 + 17,000 + 20,000 + 22,000 + 27,000 = ₹1,00,000; average = ₹20,000; goodwill = ₹20,000 × 4½ = ₹90,000.
- Suresh pays 2/24 × ₹90,000 = ₹7,500
- Dinesh receives 1/24 × ₹90,000 = ₹3,750; Ramesh receives 1/24 × ₹90,000 = ₹3,750
3. Revaluation — Fixed assets up ₹51,000; Stock down ₹8,000; Provision for doubtful debts 5% of ₹60,000 = ₹3,000. Net profit = 51,000 − 8,000 − 3,000 = ₹40,000, shared 3:3:2 → Dinesh ₹15,000, Ramesh ₹15,000, Suresh ₹10,000.
4. General Reserve — ₹80,000 shared 3:3:2 → Dinesh ₹30,000, Ramesh ₹30,000, Suresh ₹20,000.
Solution
Journal
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 2016 Apr 1 | Fixed Assets A/c Dr. | 51,000 | ||
| To Revaluation A/c | 51,000 | |||
| (Increase in value of fixed assets) | ||||
| Revaluation A/c Dr. | 11,000 | |||
| To Stock A/c | 8,000 | |||
| To Provision for Doubtful Debts A/c | 3,000 | |||
| (Decrease in stock and creation of provision for doubtful debts) | ||||
| Revaluation A/c Dr. | 40,000 | |||
| To Dinesh's Capital A/c | 15,000 | |||
| To Ramesh's Capital A/c | 15,000 | |||
| To Suresh's Capital A/c | 10,000 | |||
| (Profit on revaluation transferred to partners in old ratio 3:3:2) | ||||
| General Reserve A/c Dr. | 80,000 | |||
| To Dinesh's Capital A/c | 30,000 | |||
| To Ramesh's Capital A/c | 30,000 | |||
| To Suresh's Capital A/c | 20,000 | |||
| (General reserve transferred to partners in old ratio 3:3:2) | ||||
| Suresh's Capital A/c Dr. | 7,500 | |||
| To Dinesh's Capital A/c | 3,750 | |||
| To Ramesh's Capital A/c | 3,750 | |||
| (Goodwill adjusted in partners' capital accounts in sacrificing/gaining ratio) |
Revaluation Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Stock | 8,000 | By Fixed Assets | 51,000 |
| To Provision for Doubtful Debts | 3,000 | ||
| To Profit transferred to Dinesh (15,000), Ramesh (15,000), Suresh (10,000) | 40,000 | ||
| Total | 51,000 | Total | 51,000 |
Partners' Capital Accounts
| Particulars | Dinesh (₹) | Ramesh (₹) | Suresh (₹) | Particulars | Dinesh (₹) | Ramesh (₹) | Suresh (₹) |
|---|---:|---:|---:|---|---:|---:|---:| …
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