Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserves Rs. 36,000 and Profit and Loss Account (Dr.) Rs. 15,000. Record the necessary journal entries to the above effect.
Journal Entries in the books of the Firm
Date: [Date of Retirement]
Particulars
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General Reserve A/c Dr. 36,000 To Naresh’s Capital A/c 12,000 To Raj Kumar’s Capital A/c 12,000 To Bishwajeet’s Capital A/c 12,000 (Being General Reserve distributed among partners in their old profit sharing ratio)
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Naresh’s Capital A/c Dr. 5,000 Raj Kumar’s Capital A/c Dr. 5,000 Bishwajeet’s Capital A/c Dr. 5,000 To Profit and Loss A/c 15,000 (Being Profit and Loss Debit balance written off among partners in their old profit sharing ratio)
Explanation
The question requires adjusting the accumulated profits (General Reserve) and accumulated losses (Profit & Loss Debit) at the time of a partner's retirement. According to accounting standards, accumulated profits and losses are transferred to the Partners' Capital Accounts in their old profit-sharing ratio. Since the partners are equal partners, the ratio is 1:1:1. The General Reserve (credit balance) is credited to the partners' capital accounts, while the Profit & Loss Debit balance is debited to their capital accounts.
Solution Steps
Step 1: Determine the Profit Sharing Ratio. The partners are equal, so the ratio is 1:1:1.
Step 2: Distribute General Reserve. Total amount = Rs. 36,000. Each partner's share = Rs. 36,000 / 3 = Rs. 12,000. The General Reserve account is debited to close it, and Partners' Capital accounts are credited.
Step 3: Write off Profit & Loss (Dr.). Total amount = Rs. 15,000. Each partner's share = Rs. 15,000 / 3 = Rs. 5,000. The Partners' Capital accounts are debited, and the Profit & Loss account is credited to close it.