An adjustment of capital is an adjustment that is made in an account in order to adjust for the effect of inflation because of the change in the prices of goods and/or services used by the business. Here, stocks are excluded but items such as prepaid expenses, receivable bills, and trade debtors are included.
Sometimes, at the time of admission, the partners agree that their capitals should also be adjusted so as to be proportionate to their profit sharing ratio. In such a situation, if the capital of the new partner is given, the same can be used as a base for calculating the new capitals of the old partners. The capitals thus ascertained should be compared with their old capitals after all adjustments relating to goodwill reserves and revaluation of assets and liabilities, etc. have been made; and then the partner whose capital falls short, will bring in the necessary amount to cover the shortage and the partner who has a surplus, will withdraw the excess amount of capital.
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.
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 BYJU’S.