Question

Arun and Varun are partners sharing profits in the ratio of 4 : 3. Their Balance Sheet showed a balance of ₹ 56,000 in the General Reserve Account and a debit balance of ₹ 14,000 in Profit and Loss Account. They now decided to share the future Profits equally. Instead of closing the General Reserve Account and Profit and Loss Account, it is decided to pass an adjustment entry for the same. In adjustment entry:

Options

• Dr. Arun by ₹ 3,000; Cr. Varun by ₹ 3,000

• Dr. Arun by ₹ 5,000; Cr. Varun by ₹ 5,000

• Cr. Arun by ₹ 5,000; Dr. Varun by ₹ 5,000

• Cr. Arun by ₹ 3,000; Dr. Varun by ₹ 3,000

Answer 1

Cr. Arun by ₹ 3,000; Dr. Varun by ₹ 3,000

Explanation:

1. Net Amount to Adjust

• General Reserve Account: ₹ 56,000
• Less: Profit & Loss Account (Debit balance): – ₹ 14,000
• Net Profit/Gain Amount: ₹ 42,000

2. Calculation of Sacrificing or Gaining Share

Old share − New share 

Old Ratio (Arun : Varun): `4 : 3 (or 4/7, 3/7)`

New Ratio: `1 : 1 (or 1/2, 1/2)`

Arun's Share: `4/7 - 1/2 = (8 - 7)/14 = 1/14  "(Sacrifice)"`

Varun's Share: `3/7 - 1/2 = (6 - 7)/14 = -1/14`

3. Compensation Adjustment

Arun (Sacrificing Partner): `42,000 xx 1/14 = 3,000  "(Credit)"`

Varun (Gaining Partner): `42,000 xx 1/14 = 3,000  "(Debit)"`