Question

P, Q and R are in partnership sharing profits and losses in the ratio of 5 : 4 : 3. On 31st March 2026, their balance sheet was as follows:

Liabilities	₹	₹	Assets	₹
Sundry Creditors		50,000	Cash at Bank	40,000
Outstanding Expenses		5,000	Sundry Debtors	2,10,000
General Reserve		75,000	Stock	3,00,000
Capital Accounts:			Furniture	60,000
P	4,00,000		Plant and Machinery	4,20,000
Q	3,00,000
R	2,00,000	9,00,000
		10,30,000		10,30,000

It was decided that with effect from 1st April 2026, the profit sharing ratio will be 4 : 3 : 2. For this purpose the following revaluation were made:

1. Furniture be taken at 80% of its value.
2. Stock be appreciated by 20%.
3. Plant and Machinery be valued at ₹ 4,00,000.
4. Create provision for doubtful debts for ₹ 10,000 on debtors.
5. Outstanding expenses be increased by ₹ 3,000.

Partners agreed that altered values are not to be recorded in the books and they also do not want to distribute the general reserve.

You are required to post a single journal entry to give effect to the above. Also prepare the revised Balance Sheet.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	P’s Capital A/c Dr.		2,500
	To R’s Capital A/c			2,500
	(Being adjustment made for General Reserve and profit on revaluation due to change in profit-sharing ratio, without changing the book values.)

 

Revised Balance Sheet as at 1st April, 2026
Liabilities	₹	₹	Assets	₹
Sundry Creditors		50,000	Cash at Bank	40,000
Outstanding Expenses		5,000	Sundry Debtors	2,10,000
General Reserve		75,000	Stock	3,00,000
Capital Accounts:			Furniture	60,000
P	3,97,500		Plant and Machinery	4,20,000
Q	3,00,000
R	2,02,500	9,00,000
Total		10,30,000	Total	10,30,000

Working Notes:

1. Profit on Revaluation

Furniture reduced to 80%:

₹ 60,000 × 80% = ₹ 48,000

Loss:

₹ 60,000 − ₹ 48,000 = ₹ 12,000

Stock appreciated by 20%:

₹ 3,00,000 × 20% = ₹ 60,000

Plant and Machinery reduced:

₹ 4,20,000 − ₹ 4,00,000 = ₹ 20,000

Provision for doubtful debts:

₹ 10,000

Increase in Outstanding Expenses:

₹ 3,000

Profit on Revaluation:

₹ 60,000 − (₹ 12,000 + ₹ 20,000 + ₹ 10,000 + ₹ 3,000)

= ₹ 15,000

2. Amount to be Adjusted

General Reserve:

₹ 75,000

Add: Profit on Revaluation:

₹ 15,000

Total = ₹ 90,000

3. Gain or Sacrifice

Old ratio:

5 : 4 : 3

New ratio:

4 : 3 : 2

P: `5/12 - 4/9 = 1/36`

So P gains: `1/36`

Q: `4/12 - 3/9 = 0`

So Q has no gain or sacrifice.

R: `3/12 - 2/9 = 1/36`

So R sacrifices: `1/36`

Adjustment:

`90,000 xx 1/36 = 2,500`