Question

Arun and Varun were in partnership sharing profits in the ratio of 2 : 3. With effect from 1st May 2025 they agreed to share profits in the ratio of 1 : 2. For this purpose the goodwill of the firm is to be valued at two years’ purchase of the average profits of last three years, which were ₹ 1,50,000, ₹ 1,40,000 and ₹ 2,20,000 respectively. Reserves appear in the books at ₹ 1,10,000. Partners do not want to distribute the reserves. You are required to give effect to the change by passing a single journal entry.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Varun's Capital A/c Dr.		30,000
	To Arun's Capital A/c			30,000
	(Being adjustment made for goodwill and reserve due to change in profit-sharing ratio, without distributing the reserve.)

Working note:

Old ratio:

Arun: Varun = 2 : 3

New ratio:

Arun: Varun = 1 : 2

1. Gain/Sacrifice

Arun:

`2/5 - 1/3 = 6/15 - 5/15 = 1/15`

So, Arun sacrifices `1/15`

Varun:

`3/5 - 2/3 = 9/15 - 10/15 = -1/15`

So, Varun gains `1/15`

2. Goodwill

Average Profit:

`(1,50,000 + 1,40,000 + 2,20,000)/3 = 1,70,000`

Goodwill = 2 years' purchase:

₹ 1,70,000 × 2 = ₹ 3,40,000

Goodwill adjustment:

₹ 3,40,000 × `1/15` = ₹ 22,666.67

3. Reserve Adjustment

Reserve = ₹ 1,10,000 and is not to be distributed.

₹1,10,000 × `1/15` = ₹7,333.33

4. Total Adjustment

₹ 22,666.67 + ₹ 7,333.33 = ₹ 30,000​

Varun is the gaining partner, so he is debited; Arun is the sacrificing partner, so he is credited.