Question

A, B and C were partners sharing profits and losses in the ratio of 7 : 3 : 2. From 1st April 2025, they decided to share profits and losses in the ratio of 8 : 4 : 3. Goodwill is to be valued at the average of three years’ profits preceding the date of change in profit sharing ratio. The profits for the year ending 31st March 2022, 2023, 2024 and 2025 were ₹ 52,000, ₹ 48,000, ₹ 60,000 and ₹ 90,000 respectively. Give the necessary journal entry.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	B’s Capital A/c   ...Dr.		1,100
	C’s Capital A/c   ...Dr.		2,200
	To A’s Capital A/c			3,300
	(Being goodwill adjusted among partners due to change in profit-sharing ratio.)

Working note:

Old profit-sharing ratio:

A : B : C = 7 : 3 : 2

New profit-sharing ratio:

A : B : C = 8 : 4 : 3

1. Calculate Goodwill

Goodwill is valued at the average of three years’ profits preceding the date of change, i.e. the profits for:

2022-23 = ₹ 48,000

2023-24 = ₹ 60,000

2024-25 = ₹ 90,000

So,

Goodwill = `(48,000 + 60,000 + 90,000)/3`

= `(1,98,000)/3`

= ₹ 66,000

2. Calculate Gain or Sacrifice

Old shares:

`A = 7/15, B = 3/12, C = 2/12`

New shares:

`A = 8/15, B = 4/15, C = 3/15`

A = `7/12 - 8/15`

LCM of 12 and 15 = 60:

`35/60 - 32/60 = 3/60`

So A sacrifices: `1/20`

B = `3/12 - 4/15`

`15/60 - 16/60 = 1/60`

So B gains: `1/60`

C = `2/12 - 3/15`

`10/60 - 12/60 = -2/60`

So C gains: `2/60 = 1/30`

Thus:

A sacrifices `3/60`

B gains `1/60`

C gains `2/60`

3. Goodwill Adjustment

B’s gain: `66,000 xx 1/60 = 1,100`

C’s gain: = `66,000 xx 2/60 = 2,200`

A’s sacrifice: `66,000 xx 3/60 = 3,300`

Therefore, B and C compensate A.