The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit-sharing ratio should come into effect retrospectively were for the three years. Harry and Porter have agreement on this account. The profits for the last three years were:

Year 2015-16 2016-17 2017-18

Profit (₹) 2,20,000 2,40,000 2,90,000

Show adjustment of profits by means of a single adjustment Journal entry.

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Solution

Journal (Adjusting entry)

Date

Particular

L.F

Debit Amount
(₹)

Credit Amount
(₹)

Harry's Capital A/c

Dr.

50,000

Porter's Capital A/c

Dr.

50,000

To Ali's Capital A/c

1,00,000

(Profit adjusted due to change in profit sharing ratio)

Distribution of Profit

Old Ratio (2:2:1)
Year

Harry

Porter

Ali

Total

2015 – 16

(88,000)

(88,000)

(44,000)

=

(2,20,000)

2016 – 17

(96,000)

(96,000)

(48,000)

=

(2,40,000)

2017 – 18

(1,16,000)

(1,16,000)

(58,000)

=

(2,90,000)

Total Profit of 3 years in old ratio

(3,00,000)

(3,00,000)

(1,50,000)

=

(7,50,000)

Distribution of 3 years profit in new Ratio (1 : 1 : 1)

2,50,000

2,50,000

2,50,000

=

7,50,000

Adjusted Profit

(50,000)

(50,000)

1,00,000

NIL

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Date	Particular		L.F	Debit Amount (₹)	Credit Amount (₹)
	Harry's Capital A/c	Dr.		50,000
	Porter's Capital A/c	Dr.		50,000
	To Ali's Capital A/c				1,00,000
	(Profit adjusted due to change in profit sharing ratio)

Old Ratio (2:2:1) Year	Harry	Porter	Ali		Total
2015 – 16	(88,000)	(88,000)	(44,000)	=	(2,20,000)
2016 – 17	(96,000)	(96,000)	(48,000)	=	(2,40,000)
2017 – 18	(1,16,000)	(1,16,000)	(58,000)	=	(2,90,000)
Total Profit of 3 years in old ratio	(3,00,000)	(3,00,000)	(1,50,000)	=	(7,50,000)
Distribution of 3 years profit in new Ratio (1 : 1 : 1)	2,50,000	2,50,000	2,50,000	=	7,50,000
Adjusted Profit	(50,000)	(50,000)	1,00,000		NIL