Amit sumeet and Namit are partners shareing profit and in the ratio of 3:2:1 . On 1st April 2018 Rs 120000 in their profit and loss accounts and balance of Rs 60000 in general reserve . Record the necessary journal entries in the books of the firm. The partners decided to distribute the profit and the general reserve before bringing the new profit sharing ratio force.?

Question

Answer

Journal Entries for Distribution of Profit and General Reserve:

1. To transfer profit to partners' capital accounts:
Profit and Loss A/c Dr. 120000
To Amit's Capital A/c 54000
To Sumeet's Capital A/c 36000
To Namit's Capital A/c 18000

2. To transfer the balance of the general reserve to partners' capital accounts:
General Reserve A/c Dr. 60000
To Amit's Capital A/c 27000
To Sumeet's Capital A/c 18000
To Namit's Capital A/c 9000

Explanation:

The first entry transfers the profit to the partners' capital accounts in the old profit-sharing ratio. As per the given ratio, Amit is entitled to 3/6th of the profit, Sumeet is entitled to 2/6th of the profit, and Namit is entitled to 1/6th of the profit. Therefore, Amit's capital account is credited with Rs 54,000 (3/6 x 120,000), Sumeet's capital account is credited with Rs 36,000 (2/6 x 120,000), and Namit's capital account is credited with Rs 18,000 (1/6 x 120,000).

The second entry transfers the balance of the general reserve to the partners' capital accounts in the same ratio. The general reserve is a reserve created out of profits and is available for future contingencies. The balance of the general reserve is transferred to the partners' capital accounts to increase their capital balances. The capital balances represent the owners' equity in the business. The entry debits the general reserve account and credits the partners' capital accounts in the old ratio.

The partners decided to distribute the profit and the general reserve before bringing the new profit sharing ratio into force because it is a fair and equitable way of distributing profits. The old profit-sharing ratio was in force during the period for which the profit was earned, and therefore, it is appropriate to distribute the profit and the general reserve in that ratio. Once the profit and the general reserve have been distributed, the new profit-sharing ratio can be brought into force from the next accounting period.

Answer

Profit and loss ac (profit) 12000
to amit's capital. 60000
to sunmeet's capital. 40000
to namita capital. 20000
( distribution of profit in old profit sharing ratio)

general reserve ac. 60000
to amit's capital 30000
to sunmeet's capital. 20000
to namitas capital. 10000
( distribution of reserve in old ratio)

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