Tag: adjustment of partners capital and death of a partner

Questions Related to adjustment of partners capital and death of a partner

What is the journal entry for excess capital withdrawn by the partner?

adjustment of partners capital and death of a partner retirement/ death of a partner elements of accounts

  1. Cash/Bank A/c Dr.

    To Partners' Capital A/c

  2. Partners' Capital A/c Dr.

    To Cash/Bank A/c

  3. Partners' Capital A/c Dr.

    T\o Partners' Current A/c

  4. Partners' Current A/c Dr.

    To Partners' Capital A/c

Show answer
Correct Option: B
Explanation:
  • When a partner enter into partnership he/she is required to bring his share of capital in the firm. 

  • Capital account of each partner represents his equity in the partnership.

    Capital account of a partner is increased in the following situations:

    • The owner made additional investments during the year.
    • The owner made guaranteed payments to the firm.
    • Partnership earned profits, and a share of profits was allocated to the partner.

    The increase in the capital will record in credit side of the capital account.

    Salary and interest allowances are guaranteed payments, discussed later.

    Capital account of a partner is decreased when the owner makes withdrawals of cash or property

  • Journal entry for excess capital withdrawn by the partner is

  •      Partner's Capital A/c                Dr. 

      To Cash/Bank A/c

$A, B$ and $C$ are partners sharing profits in the ratio of $2 : 2 : 1$. $C$ retired. The new profit-sharing ratio between $A$ and $B$ will be :

adjustment of partners capital and death of a partner retirement/ death of a partner elements of accounts

  1. $2:1$

  2. $1:1$

  3. $3:1$

  4. $8:1$

Show answer
Correct Option: B
Explanation:

C’s share of profit = 1/5, to be taken by A and B equally.

A gains = 1/5 X 1/2 = 1/10

B gains = 1/5 X 1/2 = 1/10

New share of A = 2/5 + 1/10 = 4/10 + 1/10 = 5/10 = 1/2

New share of B = 2/5 + 1/10 = 4/10 + 1/10 = 5/10 = 1/2

New profit sharing ratio of A and B = 1:1