Adjustment
for current year’s profit or loss upto the date of retirement
When a partner retires
in between in an accounting year, his share of the current year’s profit or
loss upto the date of retirement has to be distributed to him. It may be
estimated based on the current year’s turnover. Previous year’s profit or the
average of the past years’ profit may also be taken as the base to estimate the
current year’s profit. The following journal entry is passed.
Note: If there is loss the reverse entry is passed.
Profit and loss suspense account is
closed by transferring to the profit and loss account at the end the accounting
period.
Illustration 14
Justina, Navi and
Rithika are partners sharing profits and losses equally. On 31.3.2019, Rithika
retired from the partnership firm. Profits of the preceding years is as
follows:
2016: ₹ 5,000; 2017: ₹ 10,000 and 2018: ₹ 30,000
Find out the share of
profit of Ritika for the year 2019 till the date of retirement if
a)
Profit is to be distributed on the basis of the previous year’s
profit
b)
Profit is to be distributed on the basis of the average profit of
the past 3 years
Also pass necessary
journal entries by assuming that partners’ capitals are fluctuating.
Solution
(a) If profit is to be distributed on the basis of the previous year’s profit:
Ritika’s share of profit for 3 months = 30,000 × 3/12 × 1/3 = ₹ 2,500
(b) If profit is to be distributed on the basis of the average profit of the past 3 years:
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