Question

Bhawana and Vedika were partners in a firm sharing profits and losses in the ratio of 5:4. From 1st April, 2024 they decided to share future profits and losses in the ratio of 4:5. On this date, their balance sheet showed a debit balance of Rs 1,80,000 in Profit and Loss Account and a balance of Rs 6,30,000 in General Reserve. Partners decided to write off debit balance in Profit and Loss Account but decided not to distribute the General Reserve.
Pass necessary journal entries for the above transactions on the reconstitution of the firm. Show your workings clearly.

Hint:

On change in PSR: 1. Existing accumulated profits/losses MUST be distributed/written off in the OLD ratio unless partners decide otherwise. 2. If partners decide NOT to distribute reserves/profits, pass an adjustment entry: Gaining Partner(s) Dr. To Sacrificing Partner(s) Cr. with the net effect amount (Total Reserve/Profit x Gain/Sacrifice Share).

Answer 1

1. Write off Debit Balance in Profit and Loss Account:
Debit Balance in P&L: ₹1,80,000
Old Ratio: Bhawana 5/9 and Vedika 4/9

Journal Entry:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
Apr 1, 2024	Bhawana's Capital A/c		1,00,000
	Vedika's Capital A/c		80,000
	To Profit and Loss A/c (Debit Balance)			1,80,000
	(Writing off Debit Balance of P&L A/c)

Calculation:
Bhawana = 1,80,000 × 5/9 = 1,00,000
Vedika = 1,80,000 × 4/9 = 80,000

2. No entry is required for General Reserve as it is NOT to be distributed.

Explanation:

P&L Debit Balance (Loss): A debit balance in the Profit and Loss account represents accumulated losses. These losses need to be written off against the partners' capital accounts in their old profit-sharing ratio. This decreases their capital balances.

General Reserve: The General Reserve is retained in the business. No distribution is made, so no journal entry is needed at this time.