Adjustment of Partner's Capital Part 3

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At the time of admission of new partner, the partners agree that their capital will be adjusted in proportion to their profit-sharing ratio. For this purpose, the capital accounts of the existing partners are prepared, making all adjustments, on account of goodwill, general-reserve, revaluation of assets and resettlement of liabilities. The partners may decide to calculate the capitals which are to be maintained in the new firm either on the basis of new Partner’s Capital and his profit-sharing ratio or on the basis of the existing partner’s capital account balances.

Image of Adjustment of Partners Capital

Image of Adjustment of Partners Capital

Image of Adjustment of Partners Capital

Adjustment of Existing Partner’S Capital Based on the Capital of the New Partner:

In this case If the existing capital of the partner after adjustment is in excess of his new capital, the excess amount is withdrawn by partner or transferred to the credit of his current account. If the existing capital of the partner is less than his new capital, the partner brings the short amount or makes transfer to the debit of his current account. Journal entries are as follows-

Capital based on the capital of the new partner

Capital Based on the Capital of the New Partner

Capital based on the capital of the new partner

When the Capital of the New Partner is Calculated in Proportion to the Total Capital of the New Firm

Sometimes capital of the new partner is not given, then he is required to bring an amount proportionate to his share of profit. In such a case, new partner’s capital will be calculated on the basis of adjusted capital of the existing partners.

Ex: After all adjustments the capital account of Sumit and Anu show the balance as Rs.90,000 and Rs.60,000 respectively. They admit Rohit as a new partner for 1/4 share in the profits.

Total profit is 1 and Rohit’s share in the profit = 1/4

Remaining share =

3/4 share of profit combined capital of Sumit and Anu=

Total Capital of the firm =

Rohit’s capital for 1/4 share of profits

So, Rohit brings in Rs. as his Capital.

Example:

Manoj and Hema are partner sharing profit and losses in the ratio of On March their Balance Sheet was as follows:

Balance Sheet of Manjo and Hema on March 31st, 2006

Table of Balance Sheet of Manjo and Hema on March 31st, 2006
Title: Table of Balance Sheet of Manjo and Hema on March 31st, 2006

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Capital:

Manoj 88,000

Hema 64,000

Sundry Creditors

Bills Payable

Reserves

1,52,000

32,000

38,000

18,000

Bank

Sundry Debtors

Bills Receivables

Stock

Investment

Machinery

Building

Goodwill

12000

45000

30000

35000

13000

40000

45000

20000

2,40,000

2,40,000

They admit Tarun into partnership on the following terms:

(i) Stock is revalued at Rs.

(ii) Building, Machinery and Investment are depreciated by 12%.

(iii) Prepaid Insurance is Rs.

(iv) Tarun brings Rs. s his capital and Rs for goodwill for share of profit of the firm.

(v) Capital of the partners shall be proportionate to their profit-sharing ratio. Adjustment of Capitals to be made by Cash.

Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet of the new firm.