Aman Shanti Kranti Partners Problem Solved

If you’ve landed on this page, you’re likely a student, educator, or accounting enthusiast grappling with a specific problem that begins with the phrase: “Aman, Shanti, and Kranti were partners…”. This isn’t just any problem; it’s a foundational case study in CBSE Accountancy and other commerce curricula that encapsulates the core principles of Partnership Accounting.

This comprehensive guide is your one-stop solution. We won’t just give you the answers; we will deconstruct the problem, explain the underlying concepts, and provide a step-by-step walkthrough that will solidify your understanding. Whether the question is about profit-sharing ratios, admission of a new partner, retirement, or dissolution, the framework remains the same. By mastering this problem, you master a significant portion of partnership fundamentals.

We will cover:

• Understanding the Partnership Deed and its implications.

• Calculating Profit & Loss Sharing Ratios (Old, New, and Sacrificing).

• Preparing Revaluation Accounts and Balance Sheets.

• Handling Goodwill in various scenarios.

• Making precise Journal Entries for every transaction.

• Adjusting Partners’ Capital Accounts.

Let’s dive into the world of Aman, Shanti, and Kranti and turn this accounting challenge into your strength.

Chapter 1: The Foundation – What is a Partnership?

Before we solve for Aman, Shanti, and Kranti, we must build a rock-solid foundation. The Indian Partnership Act, 1932, defines a partnership as “the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.”

Key Elements of a Partnership:

1. Agreement (Partnership Deed): The cornerstone of any partnership. It can be oral or written, but a written deed is always preferable to avoid disputes.

2. Business: The partnership must be formed to carry on a lawful business.

3. Sharing of Profits: The primary motive. The ratio in which profits and losses are shared is crucial.

4. Mutual Agency: Every partner is an agent of the firm and of the other partners. An act done by one partner can bind the firm and all other partners.

The Partnership Deed: The Rulebook for Aman, Shanti, and Kranti

The partnership deed for Aman, Shanti, and Kranti would typically outline:

• Profit-Sharing Ratio: The most critical figure for our problem. Is it equal? Is it 2:2:1? The problem statement will define this.

• Interest on Capital: Whether partners receive interest on the capital invested in the firm.

• Interest on Drawings: If the firm charges interest on money withdrawn by partners for personal use.

• Partners’ Salaries/Commissions: Remuneration for active partners.

• Procedures for Admission/Retirement: The rules for when a new partner joins or an existing one leaves.

In the absence of a deed, the provisions of The Indian Partnership Act, 1932, will apply (e.g., profits and losses are shared equally, no interest on capital, etc.).

Chapter 2: Meet the Partners – Understanding the Initial Setup

The typical problem statement might read something like this:

“Aman, Shanti, and Kranti were partners in a firm sharing profits and losses in the ratio of 2:2:1. Their Balance Sheet as on 31st March 2023 was as follows:”

Analysis of the Initial Position:

• Profit-Sharing Ratio (PSR): 2:2:1. This means for every ₹5 of profit, Aman gets ₹2, Shanti gets ₹2, and Kranti gets ₹1.

• Capitals: The partners have contributed different amounts. Aman has the largest capital (₹2,00,000), followed by Shanti (₹1,50,000), and Kranti (₹1,00,000). This is independent of the PSR.

• Reserves: The General Reserve of ₹30,000 is a accumulated profit from past years and belongs to the partners in their old PSR (2:2:1).

This Balance Sheet is our starting point. The subsequent questions will involve a change in the partnership, which will trigger a series of accounting adjustments.

Chapter 3: The Catalyst of Change – Common Problem Scenarios

The problem involving Aman, Shanti, and Kranti can take several forms. We will explore the most common ones in detail.

Scenario 1: Admission of a New Partner

Let’s assume the problem continues: “On 1st April 2023, they decided to admit Malti as a new partner for 1/4th share in the future profits.”

Key Concepts for Admission:

• Sacrifice Ratio: The new partner (Malti) acquires her share from the existing partners. The proportion in which the old partners give up their share is called the Sacrificing Ratio.

  • Sacrificing Ratio = Old Profit Share – New Profit Share

• Goodwill: The reputation and brand value of an established firm. When a new partner is admitted, they must compensate the old partners for their sacrifice, usually in the form of goodwill. The amount can be paid privately or brought into the firm.

Step-by-Step Solution for Scenario 1:

Step 1: Calculate the Sacrificing Ratio.
Assume the new PSR after Malti’s admission is not given, but it’s often derived. If Malti gets 1/4, the remaining share for Aman, Shanti, and Kranti is 1 – 1/4 = 3/4.
If the new PSR among Aman, Shanti, and Kranti is, say, 2:1:1, we can calculate their new shares and then the sacrifice.

• Aman’s New Share = (3/4) * (2/4) = 6/16

• Shanti’s New Share = (3/4) * (1/4) = 3/16

• Kranti’s New Share = (3/4) * (1/4) = 3/16

• Malti’s Share = 1/4 = 4/16

• So, New PSR = 6:3:3:4 (Aman:Shanti:Kranti:Malti)
  Now, calculate Sacrifice:

• Aman’s Sacrifice = Old Share (2/5) – New Share (6/16) = (32/80 – 30/80) = 2/80

• Shanti’s Sacrifice = Old Share (2/5) – New Share (3/16) = (32/80 – 15/80) = 17/80

• Kranti’s Sacrifice = Old Share (1/5) – New Share (3/16) = (16/80 – 15/80) = 1/80

• Sacrificing Ratio = 2:17:1

Step 2: Treatment of Goodwill.
Assume the Goodwill of the firm is valued at ₹1,00,000. Malti’s share of goodwill = ₹1,00,000 * (1/4) = ₹25,000.
This ₹25,000 will be credited to the old partners’ capital accounts in their sacrificing ratio (2:17:1).

• Aman’s Share = 25,000 * (2/20) = ₹2,500

• Shanti’s Share = 25,000 * (17/20) = ₹21,250

• Kranti’s Share = 25,000 * (1/20) = ₹1,250

Journal Entry for Goodwill (if brought in cash):

Cash/Bank A/c        Dr. 25,000
    To Aman's Capital A/c         2,500
    To Shanti's Capital A/c       21,250
    To Kranti's Capital A/c        1,250
(Being goodwill brought in by Malti distributed in sacrificing ratio)

Step 3: Distribution of General Reserve.
The existing General Reserve of ₹30,000 must be distributed among the old partners in their old PSR (2:2:1) before the admission.

• Aman’s Share = 30,000 * (2/5) = ₹12,000

• Shanti’s Share = 30,000 * (2/5) = ₹12,000

• Kranti’s Share = 30,000 * (1/5) = ₹6,000

Journal Entry:

General Reserve A/c        Dr. 30,000
    To Aman's Capital A/c         12,000
    To Shanti's Capital A/c       12,000
    To Kranti's Capital A/c        6,000
(Being undistributed reserve transferred to partners' capitals)

Step 4: Revaluation of Assets and Liabilities.
Often, upon admission, assets and liabilities are revalued. Suppose:

• Building appreciated by 10%. New Value = 2,80,000 + 28,000 = ₹3,08,000. (Profit)

• Stock decreased by 10%. New Value = 45,000 – 4,500 = ₹40,500. (Loss)

• Provision for Doubtful Debts to be increased to ₹7,000. (Loss of ₹2,000)

We prepare a Revaluation Account.

Journal Entry for Profit on Revaluation:

Revaluation A/c        Dr. 21,500
    To Aman's Capital A/c         8,600
    To Shanti's Capital A/c       8,600
    To Kranti's Capital A/c        4,300
(Being profit on revaluation distributed in old ratio)

Scenario 2: Retirement of a Partner (e.g., Shanti retires)

Now, let’s tackle a different scenario from the same starting point: “Shanti retires from the firm on 31st March 2023. The following adjustments were agreed upon:”

Key Concepts for Retirement:

• Gaining Ratio: The share of the retiring partner is acquired by the remaining partners. The proportion in which they acquire this share is the Gaining Ratio.

  • Gaining Ratio = New Profit Share – Old Profit Share

• Settlement Amount: The retiring partner is entitled to their capital, share of reserves, revaluation profit/loss, and goodwill. The total amount due is settled as per the deed.

Step-by-Step Solution for Scenario 2:

Step 1: Calculate Gaining Ratio.
Assume after Shanti’s retirement, the new PSR between Aman and Kranti is 3:2.

• Aman’s Gain = New Share (3/5) – Old Share (2/5) = 1/5

• Kranti’s Gain = New Share (2/5) – Old Share (1/5) = 1/5

• Gaining Ratio = 1:1

Step 2: Treatment of Goodwill.
Goodwill is valued at ₹1,00,000. Shanti’s share of goodwill = ₹1,00,000 * (2/5) = ₹40,000.
This ₹40,000 will be compensated by the gaining partners (Aman & Kranti) in their gaining ratio (1:1).

• Aman’s Capital A/c Dr. = 40,000 * (1/2) = ₹20,000

• Kranti’s Capital A/c Dr. = 40,000 * (1/2) = ₹20,000

• Shanti’s Capital A/c Cr. = ₹40,000

Journal Entry:

Aman's Capital A/c        Dr. 20,000
Kranti's Capital A/c       Dr. 20,000
    To Shanti's Capital A/c                40,000
(Being Shanti's share of goodwill adjusted through gaining partners' capital accounts)

Step 3: Distribution of General Reserve and Revaluation Profit.
This is identical to the admission process but done for the retiring partner.

• General Reserve: Shanti’s Share = 30,000 * (2/5) = ₹12,000

• Revaluation Profit (let’s assume the same ₹21,500 from before): Shanti’s Share = 21,500 * (2/5) = ₹8,600

These amounts are credited to Shanti’s Capital Account.

Step 4: Calculation of Total Amount Due to Shanti.
We need to prepare Shanti’s Capital Account.

*Note: Profit & Loss Suspense A/c is used if Shanti retires during the year, and she is entitled to a share of the current year’s profit up to the date of retirement. This is a simplified example.

The final amount due to Shanti is ₹2,31,600, which can be paid out immediately or transferred to her Loan Account.

Chapter 4: The Complete Solution Walkthrough – A Complex Problem

Let’s combine elements to solve a more complex, likely exam-level problem.

Problem Statement:
Aman, Shanti, and Kranti were partners in a firm sharing profits in the ratio of 2:2:1. On 31st March 2023, Kranti decided to retire. The Balance Sheet on that date was as provided in Chapter 2. The following adjustments were agreed upon:
a) Land and Building were to be appreciated by 20%.
b) Machinery was to be depreciated by 15%.
c) A provision of 5% was to be created on Debtors for Doubtful Debts.
d) Goodwill of the firm was valued at ₹2,00,000. Kranti’s share was to be adjusted in the Capital Accounts of Aman and Shanti, who decided to share future profits equally.
e) The capital of the new firm was fixed at ₹3,00,000 to be contributed by Aman and Shanti in their new profit-sharing ratio. The surplus/deficit, if any, in their Capital Accounts was to be adjusted.

Solution:

Part 1: Revaluation Account
We account for the adjustments (a), (b), and (c).

• Land & Building Appreciation: 20% of ₹2,80,000 = ₹56,000 (Profit)

• Machinery Depreciation: 15% of ₹1,00,000 = ₹15,000 (Loss)

• New Provision for Doubtful Debts: 5% of ₹60,000 = ₹3,000. Old Provision was ₹5,000. Since the new provision is less, it’s a profit of ₹2,000 (reversal).

Part 2: Partner’s Capital Accounts (before adjustment for capital)
We will prepare the Capital Accounts up to the point of goodwill adjustment and revaluation.

Goodwill Calculation: Total Goodwill ₹2,00,000. Kranti’s Share = (1/5) * 2,00,000 = ₹40,000. Gaining Ratio: Aman’s New Share (1/2) – Old Share (2/5) = (5/10 – 4/10)=1/10. Shanti’s Gain = (1/2)-(2/5)=(5/10-4/10)=1/10. So, Gaining Ratio 1:1. Aman and Shanti each compensate Kranti with ₹20,000.

Part 3: Adjustment of Capital
New Total Capital = ₹3,00,000.
New PSR (Aman:Shanti) = 1:1.
Therefore, required capital for each = ₹1,50,000.

• Aman’s Capital after adjustments is ₹2,34,200. He has a surplus of ₹84,200.

• Shanti’s Capital after adjustments is ₹1,84,200. She has a surplus of ₹34,200.

The firm will pay them this surplus amount.

Final Journal Entry for Cash Payment:

Aman's Capital A/c        Dr. 84,200
Shanti's Capital A/c       Dr. 34,200
    To Cash/Bank A/c                     1,18,400
(Being surplus capital paid back to partners)

Chapter 5: Advanced Concepts and Journal Entries Cheat Sheet

To fully master the Aman, Shanti, and Kranti problem, you must be comfortable with all related journal entries.

Comprehensive Journal Entry List:

1. For Goodwill (at the time of admission, premium brought in cash):

   text

   Cash/Bank A/c        Dr.
       To Premium for Goodwill A/c
   Premium for Goodwill A/c    Dr.
       To Sacrificing Partners' Capital A/cs (in Sacrificing Ratio)

2. For Distribution of Reserve:

   text

   General Reserve / Profit & Loss (Cr.) A/c    Dr.
       To All Partners' Capital A/cs (in Old Ratio)

3. For Revaluation Profit:

   text

   Revaluation A/c        Dr.
       To All Partners' Capital A/cs (in Old Ratio)

4. For Revaluation Loss:

   text

   All Partners' Capital A/cs (in Old Ratio)    Dr.
       To Revaluation A/c

5. For Adjustment of Goodwill on Retirement (without cash):

   text

   Gaining Partners' Capital A/cs (in Gaining Ratio)    Dr.
       To Retiring Partner's Capital A/c

6. For Transfer of Amount due to Retiring Partner to Loan A/c:

   text

   Retiring Partner's Capital A/c    Dr.
       To Retiring Partner's Loan A/c

Understanding these entries is crucial for solving any permutation of the problem.

Chapter 6: Why This Problem is So Important for Your Exams

The “Aman, Shanti, and Kranti” problem is not arbitrary. It is a carefully crafted question designed to test a student’s holistic understanding of Partnership Accounting. It assesses:

• Conceptual Clarity: Do you understand PSR, Sacrificing Ratio, Gaining Ratio?

• Procedural Knowledge: Can you follow the correct sequence of steps?

• Computational Skill: Can you handle fractions and percentages accurately?

• Application Skill: Can you apply the provisions of the Partnership Act when the deed is silent?

By practicing this problem in all its forms, you are essentially preparing for a wide range of potential questions. For a deeper dive into the legal framework, you can always refer to the Indian Partnership Act, 1932.

Conclusion: Your Path to Mastery

The journey through the accounts of Aman, Shanti, and Kranti is a microcosm of partnership accounting. We have covered the admission of a partner, the retirement of a partner, complex adjustments for revaluation and goodwill, and the critical final adjustments for capital.

The key to mastery is practice. Use this guide as a roadmap. Start with the basic concepts, understand the “why” behind each journal entry, and then tackle the complex problems step-by-step. Remember to always:

1. Identify the event (Admission/Retirement).

2. Determine the relevant ratios (Old, New, Sacrificing/Gaining).

3. Adjust for Reserves and Revaluation.

4. Treat Goodwill correctly.

5. Prepare the Capital Accounts and the new Balance Sheet.

With this structured approach, you will not only solve the problem of Aman, Shanti, and Kranti but also conquer any partnership problem that comes your way in examinations and real-world scenarios.