Success Roar Classes

Adjustment of Capital

Adjustment of Capitals - Success Roar Classes

What is adjustment of capital?

  1. Sometimes the capitals of the partners are adjusting at the time of admission of a new partner.
  2. Adjustment of the capital of partners in a partnership firm is another major adjustment that requires proper accounting treatment.
  3. Partner’s capitals may be adjusted in the following two ways:

How to adjust of capitals of Old Partners on the basis of Capital contribution by New Partner?

  1. In this case, the capitals of old partners are adjusted on the basis of capital contributed by the new partner.
  2. This is generally done to maintain the capitals of all partners in the proportion of new profit-sharing ratio.
  3.  Steps to Adjust the capital of old partners-

Steps

  • Check capital of new partner and his profit-sharing ratio in the firm.
  • Calculation of Overall capital of the firm
    1. Find out the Overall capital of the firm on the basis of the capital of the new partner. For this following formula can be used-

      Capital of incoming partner × Reciprocal of share of profit of an incoming partner

  • Calculation of new capitals of old partners
    1. Calculate the new capitals of old partners according to their profit-sharing ratio. This is the proportionate capital of the partners.
    2. For this following formula will be used-

= Total capital of the firm (as calculated in step-2) × share of profit of the old partners

  • Calculation of adjusted capital of All partners-
    • Find out the present capital of all partners after making all the adjustments. This is also called Adjusted capitals.
    • This can be calculated by making a statement of adjusting capital or a partner’s capital account.

  Statement of Adjusting capitals of partners (when partner’s capital account is fluctuating)

ParticularsPartner-1 (₹)Partner-2 (₹)
Opening capitals  
Add: Profit in Revaluation  
Add: Share in accumulated profits and reserves  
Add: Share in goodwill (goodwill brought by new partner)  
Add: All other credit adjustments (ex. Additional capital etc.)  
Total  
Less: Compensation of goodwill to sacrificing partner if any  
Less: Share in goodwill (Goodwill appearing in Balance Sheet)  
Less: Share in accumulated Losses  
Less: All other debit adjustments (ex. Additional capital etc.)  
Adjusted Capital  
  • Calculate the surplus or deficit capital of partners by comparing the new/proportionate capitals and present capitals/adjusted capital.
  • Now the following entry will be passed of addition or withdrawal of deficit or excess of capital.
    1. If Proportionate capital > Adjusted Capital = Deficit
    2. If Proportionate capital < Adjusted Capital = Excess/Surplus

Journal entry for adjustment of capital

ParticularsDr. (₹)Cr. (₹)
Cash/Bank / Current A/c      Dr.  
       To Old partner’s Capital A/c  
(Being deficit of capital brought in by old partner in cash adjusted through the current account)  
   
Old partner’s Capital A/c    Dr.  
       To Cash/Bank / Current A/c       
(Being excess capital taken out by old partner or adjusted through the current account)  

Note: Current account to be only used to adjust excess or deficiency of capital, if it is given in the question.

How to find out the capital contribution by of New Partners on the basis of Capital of old Partner?

  1. Sometimes the capital of the new partner is not given. In that case, he may be required to bring in proportionate capital.
  2. In such a case, the new partner’s capital will be calculated on the basis of the capital of old partners remaining after all adjustments and revaluation.
  3. Steps to find out the capital of new partner-

Steps

  • Calculation of ADJUSTED CAPITAL of old partners-
    1. Find out the present capital of all partners after making all the adjustments. This is also called Adjusted capitals.
    2. This can be calculated by making a statement of adjusting capital or partner’s capital account.

             Statement of Adjusting capitals of partners (when partner’s capital account is fluctuating)

ParticularsPartner-1 (₹)Partner-2 (₹)
Opening capitals  
Add: Profit in Revaluation  
Add: Share in accumulated profits and reserves  
Add: Share in goodwill (goodwill brought by new partner)  
Add: All other credit adjustments (ex. Additional capital etc.)  
Total  
Less: Compensation of goodwill to sacrificing partner if any  
Less: Share in goodwill (Goodwill appearing in Balance Sheet)  
Less: Share in accumulated Losses  
Less: All other debit adjustments (ex. Additional capital etc.)  
Adjusted Capital  
  • Find out the total combined share of old partners in profit of the firm.

= 1- profit sharing ratio of new partner

  • Calculation of TOTAL CAPITAL OF THE FIRM
    • Find out the Overall capital of the firm on the basis of capital of old partners adjusted capitals. For this following formula can be used-

Or Total adjusted capitals of old partners × Reciprocal of total share of profits of old partners

  • Calculate the capital of new partner

= Total capital of the firm × share of profit of new partner

Share and Enjoy !

0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
error: Content is protected !!