CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS (ACCOUNTANCY - CLASS : 12)

 

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

 

Partnership, as is commonly known, is an agreement between two or more persons for sharing the profits or losses of the business carried on by all or anyone of them acting for all. Any change in the partnership agreement brings to an end the existing agreement and a new agreement comes into force. It amounts to reconstitution of the firm.

 

Reconstitution is said to take place when there is a change in the profit-sharing ratio among the existing partners, admission of a new partner, retirement of a partner, death of a partner etc.

Due to change in profit sharing ratio, one or more of the existing partners may acquire extra share in profits. In such a case, in order to maintain equity among the partners, it is necessary to make adjustments for goodwill, revaluation of assets and reassessment of liabilities, undistributed reserves, accumulated profits and losses etc. At the time of change in profit sharing ratio we have to consider the following matters:

1.     Sacrificing Ratio, 2. Gaining Ratio, 3. Accounting for Goodwill, 4. Accounting Treatment of Reserves and Accumulated Profits or Losses, 5.Accounting for Revaluation of Assets and Reassessment of Liabilities, 6. Adjustment of Capitals.

Sacrificing Ratio: The ratio in which one or more of the existing partners surrender some of their old share in favour of one or more of other partners is called sacrificing ratio. It is calculated as:

 

Sacrificing Ratio = Old Ratio – New Ratio

 

(It is used in case of admission of a new partner, change in profit sharing ratio of existing partners)

 

Note: If New Ratio is not given in the question, Old Ratio will be considered as Sacrificing Ratio.

 

 

Gaining Ratio: The ratio of gain of profit sharing ratio is called gaining ratio. It is calculated as:

 

Gaining Ratio = New Ratio – Old Ratio

 

(It is used in case of retirement or death of an existing partner & change in profit sharing ratio of existing partners)

 

 

Note: If New Ratio is not given in the question, Old Ratio of the existing partners will be taken as Gaining Ratio.

 

Accounting treatment of Goodwill when there is change in the profit sharing ratio of existing partners

 

According to AS 26, goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, only purchased goodwill should be recorded in the books.


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