A capital adjustment is essential for addressing the effects of inflation on accounts. While stocks are excluded, items like receivables, prepaid expenses, and trade creditors are included. Partners can agree to adjust their capitals to align with their profit shares. This process involves comparing newly calculated capitals against previous ones after accounting for goodwill reserves, asset revaluations, and other adjustments. Partners with a deficit will need to contribute the required amount, while those with surplus capital can withdraw their excess.

Illustration:

P and Q are partners sharing profits in the ratio of 2:1. R is admitted into the firm for 1/4 share of profits. R brings in Rs. 20,000 in respect of his capital. The capitals of old partners P and Q, after all adjustments relating to goodwill, revaluation of assets and liabilities, etc., are Rs. 48,000 and Rs. 16,000 respectively. It is agreed that partners’ capitals should be according to the new profit sharing ratio.

Determine the new capitals of P and Q and record the necessary journal entries assuming that the partner whose capital falls short, brings in the amount of deficiency and the partner who has an excess, withdraws the excess amount.

Solution

The above mentioned is the concept that is explained in detail about the Adjustment of Capitals for the Class 12 Commerce students. To know more, stay tuned to Eduacademy