Question

The following is the balance sheet of a firm as at 31st March, 2026:

Liabilities	₹	₹	Assets	₹
Capital Accounts:			Building	6,50,000
A	4,00,000		Plant and Machinery	5,00,000
B	4,00,000		Stock	3,00,000
C	3,00,000		Debtors	2,40,000
D	3,00,000	14,00,000	Bills Receivable	10,000
Reserves		1,50,000	Cash at Bank	20,000
Profit & Loss A/c (Profits)		90,000
Creditors		80,000
		17,20,000		17,20,000

On 1st April, 2026, the assets and liabilities were revalued as under:

	₹
Building	8,00,000
Plant and Machinery	3,20,000
Stock	2,60,000
Creditors	84,000

A provision of 5% was required on debtors. Goodwill of the firm is valued at ₹ 1,70,000. Partners agreed that from 1st April, 2026 they will share profits in the ratio of 4 : 3 : 2 : 1 instead of their former ratio of 5 : 4 : 2 : 1. They do not want to record the revised values of assets and liabilities in the books. They also do not want to disturb the reserves and Profit & Loss A/c.

Pass a single journal entry to give effect to the above.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	C's Capital A/c   ...Dr.		10,800
	D's Capital A/c   ...Dr.		5,400
	To A's Capital A/c			5,400
	To B's Capital A/c			10,800
	(Being adjustment made for goodwill, reserves, P&L profit and revaluation consequent upon change in profit-sharing ratio)

Working note:

1. Old and New Profit-Sharing Ratios

Old ratio of A, B, C and D = 5 : 4 : 2 : 1

New ratio = 4 : 3 : 2 : 1

Old shares:

A = `5/12`

B = `4/12 = 1/3`

C = `2/12 = 1/6`

D = `1/12`

New shares:

A = `4/10 = 2/5`

B = `3/10`

C = `2/10 = 1/5`

D = `1/10`

Sacrifice/Gain

A's sacrifice:

= `5/12 − 2/5`

= `25/60 − 24/60`

= `1/60`

B's sacrifice:

= `1/3 − 3/10`

= `10/30 − 9/30`

= `1/30`

C's gain:

= `1/5 − 1/6`

= `1/30`

D's gain:

= `1/10 − 1/12`

= `1/60`

Therefore:

Sacrificing partners: A and B

Gaining partners: C and D

2. Revaluation of Assets and Liabilities

Gains:

Building:

₹ 8,00,000 − ₹ 6,50,000 = ₹ 1,50,000 Gain

Losses:

Plant and Machinery:

₹ 5,00,000 − ₹ 3,20,000 = ₹ 1,80,000 Loss

Stock:

₹ 3,00,000 − ₹ 2,60,000 = ₹ 40,000 Loss

Creditors:

₹ 84,000 − ₹ 80,000 = ₹ 4,000 Loss

Provision on Debtors:

5% of ₹ 2,40,000

= ₹ 12,000 Loss

Total Loss:

₹ 1,80,000 + ₹40,000 + ₹4,000 + ₹12,000 = ₹2,36,000

Less: Gain on Building = ₹ 1,50,000

Loss on Revaluation = ₹ 86,000

3. Reserves and Profit & Loss A/c

Reserve = ₹ 1,50,000

Profit & Loss A/c (Profit) = ₹ 90,000

Total accumulated profits:

= ₹ 1,50,000 + ₹ 90,000 = ₹ 2,40,000

Since these accounts are not to be disturbed, an adjustment is made through partners' capital accounts.

4. Goodwill

Goodwill of the firm = ₹ 1,70,000

Therefore, total amount relating to goodwill and accumulated profits:

₹ 1,70,000 + ₹ 2,40,000 = ₹ 4,10,000

Because the assets and liabilities are also not to be shown at revised values, the revaluation loss of ₹ 86,000 has the opposite adjustment effect.

Net amount for adjustment:

₹ 4,10,000 − ₹ 86,000 = ₹ 3,24,000

5. Capital Adjustment

A:

Sacrifice = `1/60`

₹ 3,24,000 × `1/60` = ₹ 5,400 Credit

B:

Sacrifice = `1/30`

₹ 3,24,000 × `1/30` = ₹ 10,800 Credit

C:

Gain = `1/30`

₹ 3,24,000 × `1/30` = ₹ 10,800 Debit

D:

Gain = `1/60`

₹ 3,24,000 × `1/60` = ₹ 5,400 Debit