Illustration 34(C). The partners of a firm, Alia, Bhanu and Chand distributed the profits for the year ended 31st March, 2024, ₹80,000 in the ratio of 3:3:2 without providing for the following adjustments: (a) Alia and Chand were entitled to a salary of ₹1,500 each per month. (b) Bhanu was entitled to a salary of ₹4,000 per annum. Pass the necessary journal entry for the above adjustments in the books of the firm. Show workings clearly. (C.B.S.E., Sample Paper 2019-20-modified)
Answer (1)
To address the question, we need to adjust the profit distribution in the books of the firm due to salaries not accounted for initially.
Step-by-step Solution
Initial Profit Distribution:
The firm's profit was ₹80,000, distributed in the ratio 3:3:2 among Alia, Bhanu, and Chand:
Alia's share of profit: 8 3 × 80 , 000 = 30 , 000
Bhanu's share of profit: 8 3 × 80 , 000 = 30 , 000
Chand's share of profit: 8 2 × 80 , 000 = 20 , 000
Salaries Entitlement:
Alia's salary: ₹1,500 per month × 12 months = ₹18,000 annually
Chand's salary: ₹1,500 per month × 12 months = ₹18,000 annually
Bhanu's salary: ₹4,000 per annum
Adjustments Required:
We need to adjust salaries, reducing profits accordingly since the salaries were not originally considered in the profit distribution.
Calculate Total Adjustments:
Total Salary to be adjusted:
Alia: ₹18,000
Bhanu: ₹4,000
Chand: ₹18,000
Sum = ₹18,000 + ₹4,000 + ₹18,000 = ₹40,000
Adjust the Profits:
Modify the partner's profit shares by deducting from their books the unrecorded salaries which they are entitled to:
Journal Entry for Salary Adjustments:
Dr. Alia's Capital Account: ₹18,000 Dr. Bhanu's Capital Account: ₹4,000 Dr. Chand's Capital Account: ₹18,000 Cr. Profit and Loss Adjustment Account: ₹40,000
This entry accounts for the difference, ensuring that each partner gets their accurate profit share adjusted for the salaries entitled.
Net Profit after Adjustments:
Recomputed Profit for Distribution = Original Profit - Total Adjustments:
80 , 000 − 40 , 000 = 40 , 000
Revised Profit Distribution (after salaries):
Alia's final profit share = Alia's share after salary adjustment: ₹30,000 - ₹18,000 = ₹12,000
Bhanu's final profit share = Bhanu's share after salary adjustment: ₹30,000 - ₹4,000 = ₹26,000
Chand's final profit share = Chand's share after salary adjustment: ₹20,000 - ₹18,000 = ₹2,000
These calculations ensure each partner receives the correct profit allocation aligned with their partnership agreement.
