The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2:2:1, has existed for some years. Ali wants that he should get an equal share in the profits with Harry and Porter, and he further wishes that the change in the profit-sharing ratio should come into effect retrospectively for the last three years. Harry and Porter have no objection to this. The profits for the last three years were:
| Year | Amount (₹) |
|---|---|
| 2014-15 | 22,000 |
| 2015-16 | 24,000 |
| 2016-17 | 29,000 |
Show adjustment of profits by means of a single adjustment journal entry.
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Start your 14-day free trial to unlock the full solution →Ali gains an equal 1/3 share retrospectively for three years; the adjustment entry debits Harry and Porter ₹5,000 each and credits Ali ₹10,000.
Concept First: Why a Single Adjustment Entry Works
When partners change their profit-sharing ratio retrospectively — meaning the new ratio applies to profits already distributed under the old ratio — the firm must correct the past allocations. The old ratio gave each partner a certain share of each year's profit; the new ratio gives a different share. The difference for each partner across all three years is a net amount either owed to or by that partner.
Instead of reopening each year's books and passing multiple entries, we pass one single journal entry that transfers the net effect. The partner who received more than they should have under the new ratio is debited (they owe the firm), and the partner who received less is credited (the firm owes them). This is the cleanest, exam-smartest way to handle retrospective changes.
The rule: Debit the loser(s), Credit the gainer(s). The amount is the net surplus or deficiency each partner experienced over the adjustment period.
Step 1: Determine the Old and New Ratios
Old ratio (Harry : Porter : Ali) = 2 : 2 : 1
Total = 5 parts.
Ali wants an equal share with Harry and Porter. That means each of the three gets 1/3.
New ratio = 1 : 1 : 1.
Step 2: Calculate Each Partner's Share Under Both Ratios for Each Year
We have three years of profits:
| Year | Profit (₹) |
|---|---|
| 2014-15 | 22,000 |
| 2015-16 | 24,000 |
| 2016-17 | 29,000 |
Old ratio shares (2:2:1):
| Year | Harry (2/5) | Porter (2/5) | Ali (1/5) |
|---|---|---|---|
| 2014-15 | 8,800 | 8,800 | 4,400 |
| 2015-16 | 9,600 | 9,600 | 4,800 |
| 2016-17 | 11,600 | 11,600 | 5,800 |
| Total | 30,000 | 30,000 | 15,000 |
New ratio shares (1/3 each):
| Year | Harry (1/3) | Porter (1/3) | Ali (1/3) |
|---|---|---|---|
| 2014-15 | 7,333.33 | 7,333.33 | 7,333.33 |
| 2015-16 | 8,000 | 8,000 | 8,000 |
| 2016-17 | 9,666.67 | 9,666.67 | 9,666.67 |
| Total | 25,000 | 25,000 | 25,000 |
Do not round prematurely. The totals must reconcile exactly to the sum of all profits (₹75,000). Notice that 25,000 + 25,000 + 25,000 = 75,000, and 30,000 + 30,000 + 15,000 = 75,000. The fractions work out cleanly because 75,000 is divisible by 3.
Step 3: Find the Net Gain or Loss for Each Partner
Compare what each actually received (old ratio) with what they should have received (new ratio):
| Partner | Old Total (₹) | New Total (₹) | Difference (₹) |
|---|---|---|---|
| Harry | 30,000 | 25,000 | -5,000 (excess) |
| Porter | 30,000 | 25,000 | -5,000 (excess) |
| Ali | 15,000 | 25,000 | +10,000 (deficit) |
Harry and Porter each received ₹5,000 more than they were entitled to under the new retrospective arrangement. Ali received ₹10,000 less.
Step 4: The Single Adjustment Journal Entry
Harry and Porter must give back their excess to Ali. So: …
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