Journal
Date	Particulars		L.F.	Amount Rs	Amount Rs
2015
Mar. 31	Revaluation A/c	Dr.		1,840
	To Stock A/c				1,550
	To Reserve for Doubtful Debts A/c				25
	To Reserve for Legal Charges A/c				265
	(Assets and Liabilities are revalued)

Mar. 31	Factory Building A/c	Dr.		1,440
	To Revaluation A/c				1,440
	( Factory Building appreciated)

Mar. 31	Rajesh’s Capital A/c	Dr.		160
	Pramod’s Capital A/c	Dr.		120
	Nishant’s Capital A/c	Dr.		120
	To Revaluation A/c				400
	(Loss on Revaluation adjusted to Partners’ Capital Account)

Mar. 31	Rajesh’s Capital A/c	Dr.		2,000
	Nishant’s Capital A/c	Dr.		1,000
	To Pramod Capital’s A/c				3,000
	(Pramod’s share of goodwill adjusted to Rajesh’s and Nishant’s Capital Account in their gaining ratio)

Mar. 31	Reserve Fund A/c	Dr.		2,750
	To Rajesh’s Capital A/c				1,100
	To Pramod’s Capital A/c				825
	To Nishant’s Capital A/c				825
	(Reserve Fund distributed all the partners)

Mar. 31	Pramod’s Capital A/c	Dr.		18,705
	To Pramod’s Loan A/c				18,705
	(Pramod’s Capital transferred to his Loan Account)

Mar. 31	Rajesh’s Capital A/c	Dr.		940
	Nishant’s Capital A/c	Dr.		2,705
	To Rajesh’s Current A/c				940
	To Nishant’s Current A/c				2,705
	(Excess in Capital Account is transferred to Current Account)

Parters’ Capital Account
Dr.				Cr.
Particulars	Rajesh	Pramod	Nishant		Particulars	Rajesh	Pramod	Nishant
Revaluation (Loss)	160	120	120		Balance b/d	20,000	15,000	15,000
Pramod’s Capital A/c	2,000		1,000		Reserve Fund	1,100	825	825
Pramod’s Loan A/c		18,705			Rajesh’s Capital A/c		2,000
Rajesh's Current A/c	940				Nishant’s Capital A/c		1,000
Nishant's Current A/c			2,705
Balance c/d	18,000		12,000
	21,100	18,825	15,825			21,100	18,825	15,825

Balance Sheet as on March 31, 2015
Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Current Account:			Stock	15,500
Rajesh	940		Less: 10% Depreciation	(1,550)	13,950
Nishant	2,705	3,645
Capital Account:			Factory Building	12,000	13,440
Rajesh	18,000		Add: 12% Appreciation	1,440
Nishant	12,000	30,000	Bank Balance		13,000
		68,865			68,865

Working Notes:

1) Pramod’s share of goodwill = Total goodwill of the firm × Retiring Partner’s Share =

2) Gaining Ratio = New Ratio − Old Ratio

Gaining Ratio between Rajesh and Nishant = 2:1

NOTE: In the above solution, in order to adjust the capital of remaining partners in the new firm according to their new profit sharing ratio, the surplus or the deficit of Capital Account is transferred to their Current Account. But, in order to match the answer with that of given in the book, the surplus or the deficit amount of the Partners' Capital Account, will either be withdrawn or brought in by the old partners. This treatment will be shown in the Partners’ Capital itself and no need to transfer the surplus or deficit capital balance to their Current Accounts. The following Journal entry is passed to record the withdrawal of surplus capital by the partners.

If existing partners withdraw their excess capital

Journal entry

Rajesh’s Capital A/c	Dr.	940
Nishant’s Capital A/c	Dr.	2,705
To Bank A/c			3,645
(Surplus Capital withdrawn)

Balance Sheet as on March 31, 2015
Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Capital:			Stock	15,500
Rajesh	18,000		Less: 10% Depreciation	(1,550)	13,950
Nishant	12,000	30,000
			Factory Building	12,000
			Add: 12% Appreciation	1,440	13,440
			Bank Balance		9,355
		65,220			65,220

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Books of Rajesh, Pramod and Nishant Balance Sheet as on March 31, 2015
Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		6,250	Factory Building		12,000
Sundry Creditors		10,000	Debtors	10,500
Reserve Fund		2,750	Less: Reserve	500	10,000
Capital Accounts:			Bills Receivable		7,000
Rajesh	20,000		Stock		15,500
Pramod	15,000		Plant and Machinery		11,500
Nishant	15,000	50,000	Bank Balance		13,000
		69,000			69,000

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