Question

X, Y and Z are partners in a firm sharing profits in the ratio 4 : 3 : 2. Their Balance Sheet as at 31-3-2023 showed a debit balance of Profit & Loss A/c ₹ 1,80,000. From 1-4-2023 they will share profits equally. In the necessary journal entry to give effect to the above arrangement when X, Y and Z decided not to close the Profit & Loss Account:

Options

• Dr. X by ₹ 20,000; Cr. Z by ₹ 20,000

• Cr. X by ₹ 20,000; Dr. Z by ₹ 20,000

• Dr. X by ₹ 40,000; Cr. Z by ₹ 40,000

• Cr. X by ₹ 40,000; Dr. Z by ₹ 40,000

Answer 1

Dr. X by ₹ 20,000; Cr. Z by ₹ 20,000

Explanation:

1. Gain/Sacrifice Share Calculation

Old share − New share

Old Ratio: `4 : 3 : 2 (or 4/9, 3/9, 2/9)`

New Ratio: `1 : 1 : 1 (or 1/3, 1/3, 1/3, = 3/9, 3/9, 3/9)`

X's Share: `4/9 - 3/9 = 1/9  "(Sacrifice)"`

Y's Share: `3/9 - 3/9 = 0  "(No change)"`

Z's Share: `2/9 - 3/9 = -1/9  "(Gain)"`

2. Compensation Entry Adjustment

Value to adjust: ₹ 1,80,000 (Debit balance / Loss)

Rule for Accumulated Loss: When partners decide not to close a loss account, the normal profit entry is reversed: Sacrificing Partner is Debited and Gaining Partner is Credited.

X (Sacrificing Partner): `1,80,000 xx 1/9 = 20,000  "(Debit)"`

Z (Gaining Partner):  `1,80,000 xx 1/9 = 20,000  "(Credit)"`