Adjustment of capitals

Accounting for partnership

1. Prasanth Venpakal ADJUSTMENT OF CAPITALS

2. Adjustment of Capitals At the time of admission, the partners agree that their capitals should also be adjusted so as to be proportionate to their profit sharing ratio. In such a situation, if the capital of the new partner is given, the same can be used as a base for calculating the new capitals of the old partners. The capitals thus ascertained should be compared with their old capitals after all adjustments relating to goodwill reserves and revaluation of assets and liabilities, etc. have been made; and then the partner whose capital falls short, will bring in the necessary amount to cover the shortage and the partner who has a surplus, will withdraw the excess amount of capital.

3. Journal Entry Partner’s Capital A/c Dr. To Cash A/c ( Excess capital withdrawn by Partner) Cash A/c Dr. To Partner’s Capital A/c ( Deficiency in partner’s , additional amount brought in by partner )

4. ADJUSTING EXCESS AMOUNTS TO CURRENT ACCOUNTS Partner’s Current A/c Dr . To Partner’s Capital A/c ( Deficiency in partner’s capital transferred to Partner’s Current Account) Partner’s Capital A/c Dr . To Partner’s Current A/c ( Excess Capital of Partner transferred to their current account)

5. Illustration A and B are partners sharing profits in the ratio of 2:1. C is admitted into the firm for 1/4 share of profits. C brings in Rs . 20,000 in respect of his capital. The capitals of old partners A and B, after all adjustments relating to goodwill, revaluation of assets and liabilities, etc., are Rs . 48,000 and Rs . 16,000 respectively . It is agreed that partners’ capitals should be according to the new profit sharing ratio. Determine the new capitals of A and B and record the necessary journal entries assuming that the partner whose capital falls short, brings in the amount of deficiency and the partner who has an excess, withdraws the excess amount.

6. solution

7. Solution Total capital of firm = 20000 × 4/1 = 80000 A’s New capital = 80000 × 2/4 = 40000 A’s Excess Capital = 48000 – 40000 = 8000 B’s New capital = 80000 × ¼ = 20000 B’s Additional contribution = 20000 – 16000 = 4000

8. Journal entry A’s Capital A/c Dr . 8000 To Cash A/c 8000 (Excess capital withdrawn by A ) Cash A/c Dr. 4000 To B’s Capital A/c 4000 (Deficiency in B’s capital, additional amount brought in by B )

9. ADJUSTING EXCESS AMOUNTS TO CURRENT ACCOUNTS A’s Capital A/c Dr. 8000 To A’s Current A/c 8000 (Excess Capital of A transferred to their current account) B’s Current A/c Dr . 4000 To B’s Capital A/c 4000 ( Deficiency in B’s capital transferred to Partner’s Current Account)