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How Will You Deal with a Change in the Profit Sharing Ratio Among Existing Partners? Take Imaginary Figures to Illustrate Your Answer? - Accountancy

Answer in Brief

How will you deal with a change in the profit sharing ratio among existing partners?Take imaginary figures to illustrate your answer?

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Solution

Usually due to the admission, retirement or death of a partner or sometimes due to the general agreement among the partners, they may decide to change the profit sharing ratio. Various adjustments that should be considered during the change in the profit sharing ratio are , goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capitals, etc. The general reserves and accumulated profits (if any) and profit (or loss) on revaluation on assets and liabilities should be credited (debited) in the Partner's Capital Account in their old profit sharing ratio.
But if the existing partners decide to change the profit sharing ratio then some partners gain (gaining partners) at the cost of other partners (sacrificing partners). Thus, the former should compensate the latter. Therefore, the gaining Partners’ Capital Account s are debited to the extent of their gain and sacrificing Partners' Capital Accounts are credited to extent of their sacrifice. The following Journal entry is passed.
Gaining Partner's Capital A/c                                            Dr.
              To Sacrificing Partner's Capital A/c
(Adjustment entry passed)
Example:
A, B, C are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows Rs 1,20,000 as general reserve, profit due to revaluation of building Rs 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Particulars A B C
Share of profit as per 3:2:1 60,000 40,000 20,000
Profit on revaluation of building 15,000 10,000 5,000
  75,000 50,000 25,000
Share of profit as per 1:1:1 50,000 50,000 50,000
       
Difference (Gain or Loss 25000 - 25000
 

(Loss)

  (Gain)

Hence, in this example, C gains at the cost of A, so the partner A needs to be compensated by C with the amount of Rs 25,000. The following adjustment entry is passed.

Adjustment Entry :

C's Capital A/c

Dr.

25,000

 

          To A's Capital A/c

 

 

25,000

( Adjustment entry passed)

 

 

 

  Is there an error in this question or solution?
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APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 2 Accounting for Partnership Firms-Fundamentals
Exercise | Q 5 | Page 98
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