Question

P, Q and R are partners in a firm sharing profits in the ratio of 2 : 2 : 1. On March 31, 2024, their Balance Sheet showed a general reserve of ₹ 3,00,000. On that date they decided to share future profits equally. Record the necessary journal entry in the books of the firm under the following circumstances:

1. When they want to transfer the general reserve in their capital accounts.
2. When they don't want to transfer general reserve in their capital accounts and prefer to record an adjustment entry for the same.

Answer 1

(i) When General Reserve is transferred to Capital Accounts

It is distributed in the old ratio 2 : 2 : 1.

`P = 3,00,000 xx 2/5 = 1,20,000`

`Q = 3,00,000 xx 2/5 = 1,20,000`

`R = 3,00,000 xx 1/5 = 60,000`

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	General Reserve A/c   ...Dr.		3,00,000
	To P's Capital A/c			1,20,000
	To Q's Capital A/c			1,20,000
	To R's Capital A/c			60,000
	(Being the accumulated General Reserve transferred to partners' capital accounts in their old profit-sharing ratio)

(ii) When General Reserve is not transferred

First calculate gain/sacrifice.

P: `2/5 - 1/3 = (6 - 5)/15 = 1/15`

So P sacrifices `1/15`

Q: `2/5 - 1/3 = 1/15`

So P sacrifices `1/15`

R: `1/5 - 1/3 = (3 - 5)/15 = 2/15`

So P gains `2/15`

Adjustment on reserve:

`3,00,000 xx 1/15 = 20,000`

Therefore:

P gets ₹ 20,000

Q gets ₹ 20,000

R gives ₹ 40,000

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	R's Capital A/c   ...Dr.		40,000
	To P's Capital A/c			20,000
	To Q's Capital A/c			20,000
	(Being the adjustment entry passed for goodwill by debiting the gaining partner's capital account and crediting the sacrificing partners' capital accounts in their sacrificing ratio)