Adjustment for current year’s profit or loss upto the date of retirement

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: