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+--- Thread: partnership conversion question (/showthread.php?tid=7367)
partnership conversion question - sehrish khan - 02-09-2010
there were 3 partners A,B and C carrying business on july 1 2008 C due to heavy losses in his personal business requested to settle his accounts but at the same time A and B agreed to convert partnership into company.salaries of 300 thousand had been credited to each partners capital account while recording the profit at the year end june 30 2007.on insistence of C,it was agreed that based on the amount of efforts put in by A and B,the salaries allowed to them should be reduced by 30% .
what will be its treatment i found the following solution but i am not satisfied please somebody explain it
capital A 90(Dr)
capital B 90(Dr)
profit to be distributed 180(Cr)
profit 180 (Dr) (532)
capital A 90(Cr)
capital B 54(Cr)
capital C 36(Cr)
- israrhere - 02-09-2010
The salary credited to each partner's capital account was Rs.300 thousand so to reduce it by 30% we should debit capital accounts of A & B by 90 nd credit da accumultated profit nd then distribute the amount (180) to all da partners in P/L sharing ratio.
So da entries u made are right.
- sehrish khan - 02-09-2010
thanks israr for confirming it but still i am confused why we reduced the salaries of A and B
"based on the amount of efforts put in by A and B"
please can u explain the concept behind this statement
- israrhere - 02-10-2010
Dear sehrish khan there z no concept behind this statement so don't get confused urself with dis...
As u know in partnership firm partners may take part in conducting business of the firm for which they are given salaries,commision etc.such salaries r nt expenses of the firm but r given out of the profits.
One partner may contribute more efforts than others.As in dis case C says dat his efforts were more than that of A & B so their salaries should be reduced by 30%.If we reduce it da profit to b distributed will increase nd dat increment in profit s credited in partners' capital accounts in P/L sharing ratio.
Hope it will be clear now...
- sehrish khan - 02-10-2010
thanks israr it is cleared.