Question

A, B and C were partners in a firm sharing profits in the ratio of 1 : 3 : 2. They decided that with effect from 1st April, 2026, they will share profits in the ratio of 4: 6 : 5. For this purpose the goodwill of the firm is valued at the total of preceding three years' profits. The profits were:

	₹
2021-22	40,000
2022-23	10,000 (Loss)
2023-24	80,000 (Loss)
2024-25	1,20,000
2025-26	1,40,000

Reserves and Profits appeared in the balance sheet at ₹ 40,000 and ₹ 30,000 respectively. Partners do not want to distribute the reserves and profits appearing in the balance sheet. Pass a single journal entry to record the change.

Answer 1

Old profit-sharing ratio:

A : B : C = 1 : 3 : 2

New profit-sharing ratio:

A : B : C = 4 : 6 : 5

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	A’s Capital A/c Dr.		25,000
	To B’s Capital A/c			25,000
	(Being adjustment made for goodwill, reserves and accumulated profits due to change in profit-sharing ratio without distributing the reserves and profits.)

Working Note:

1. Value of Goodwill

The change takes effect from 1 April 2026, so the preceding three years are:

2023–24: Loss ₹ 80,000

2024–25: Profit ₹ 1,20,000

2025–26: Profit ₹ 1,40,000

Goodwill is valued at the total of preceding three years’ profits:

−₹ 80,000 + ₹ 1,20,000 + ₹ 1,40,000 = ₹ 1,80,000

2. Reserves and Profits

Reserve:

₹ 40,000

Accumulated Profit:

₹ 30,000 

Total:

₹ 40,000 + ₹ 30,000 = ₹ 70,000​

3. Total Amount for Adjustment

₹ 1,80,000 + ₹ 70,000 = ₹ 2,50,000

4. Gain or Sacrifice

A:

`1/6 - 4/15 = 5/30 - 8/30 = -3/30`

Therefore, A gains: `1/10`

B:

`3/6 - 6/15 = 1/2 - 2/5 = 1/10`

Therefore, B sacrifices `1/10`

C:

`2/6 - 5/15 = 1/3 - 1/3 = 0`

C neither gains nor sacrifices.

5. Adjustment Amount

`2,50,000 xx 1/10 = 25,000`

Hence:

A Dr. ₹ 25,000 and B Cr. ₹ 25,000