Question

A, B, C and D are partners in a firm. Their respective capitals were ₹ 4,00,000, ₹ 3,00,000, ₹ 2,00,000 and ₹ 1,00,000. The firm earned a profit of ₹ 2,50,000 for the year ended 31st March 2022. Profits were distributed in the ratio of their capitals, without providing for the following provisions of the partnership deed:

1. A’s guarantee to the firm that the firm would earn a profit of at least ₹ 3,00,000. Any shortfall in the firm's profits would be personally met by him.
2. Profits are to be shared equally.

You are required to pass the necessary journal entries to rectify the error.

Hint: Separate adjusting entries are to be passed.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2022
March 31	A’s Capital A/c   ...Dr.		1,00,000	-
	B’s Capital A/c   ...Dr.		75,000	-
	C’s Capital A/c   ...Dr.		50,000	-
	D’s Capital A/c   ...Dr.		25,000	-
	To Profit and Loss Adjustment A/c		-	2,50,000
	(Being previously distributed profit of ₹ 2,50,000 reversed through Profit and Loss Adjustment A/c.)
March 31	A’s Capital A/c   ...Dr.		50,000	-
	To Profit and Loss Adjustment A/c		-	50,000
	(Being shortfall in profit debited to A’s Capital Account.)
March 31	Profit and Loss Adjustment A/c   ...Dr.		3,00,000	-
	To A’s Capital A/c		-	75,000
	To B’s Capital A/c		-	75,000
	To C’s Capital A/c		-	75,000
	To D’s Capital A/c		-	75,000
	(Being correct profit of ₹3,00,000 distributed equally among the partners.)