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Smart way of learning Accounts Tips and Tricks
Chapter - 3
Change in profit sharing ratio
When all the partners of a firm agree to change their profit sharing ratio, it leads to reconstitution
(ie. any change in partnership agreement ) of firm.
Sacrificing ratio
Sacrificing ratio is the ratio in which existing partner sacrifyce their share of profit in favour of the
gaining partner .
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Gaining partner Capital A/c Dr. XXX
-------To Sacrifycing partner capital A/c XXX
(Being adjustment of goodwill made on change in
profit sharing ratio)
When old goodwill appears in the books then first of all this is written off in the old ratio.
Remember Old Goodwill Old Ratio
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
All Partners's Capital A/c Dr. XXX
-------To Old Goodwill A/c XXX
(Being old goodwill write off in old ratio on change
in profit sharing ratio)
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During change in profit sharing ratio all partners distribute available Reserves and Accumulated
Profits in their old profit sharing ratio in order to avoid future dispute in context of old Reserves and
Accumulated Profit / Loss.
Such Reserve & accumulated profit / loss have been set apart out of profit in earlier period .
Two method for treatment of available Reserves and Accumulated Profits / Loss:
Mehtod 1 :
When Question is silent regarding treatment of available Reserves and Accumulated
Profit/losses , these are to be distributed among old partners in their old profit sharing ratio.
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
General reserve / Reserve fund
Contingency Reserve
Workmen compensation reserve
Investment fluctuation reserve
Profits & Loss A/c (Cr) Dr.
-------To All old partner capital A/c
(Being existing reserves and accumulated profits
distributed among old partners in their old ratio)
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
All old partner capital A/c Dr.
-------To Profits & Loss A/c (Dr)
-------To Fictitious Asset A/c
(Being Fictitious Asset written off among old
partners in their old ratio )
Note :
1. Distributable Reserve may be of following nature :
General reserve / Reserve fund
Contingency Reserve
Workmen compensation reserve
Investment fluctuation reserve
2. Any Fictitious Asset like Deferred Revenue Expenditure , Advertisement expense , Profits & Loss
A/c (Dr) must be written off among old partners in their old ratio.
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Mehtod 2 :
When Question says existing reserves and accumulated profits/losses will not be affected and
remain in the future books with same figure.
In such case , accumulated profits/losses are not be distributed among old partners at the time of
change in profit sharing ratio.
In this case, the gaining partner must compensate the sacrificing partner for the share gained by
him through the following journal entry
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Gaining partner Capital A/c Dr. XXX
-------To Sacrifycing partner capital A/c XXX
(Being adjustment of existing reserves and
accumulated profits/losses made on change in
profit sharing ratio)
At the time of change in profit sharing ratio of existing partners, assets and liabilities of
a firm must be revalued to determine the profit/loss arise on revaluation of asset & reassessment
of liability .
Profit/loss arise on revaluation of asset & reassessment of liability transfer to all partner capital a/c
in their old profit sharing ratio.
Such change in value of assets and liabilities belongs to the period prior to change in profit sharing
ratio and therefore it must be shared in old profit sharing ratio.
To↑ in liability/unrecorded
xxx By liability xxx
liability
By loss on
To profit on xxx xxx
revaluation(bal.fig)
revaluation(bal.fig)
xxx xxx
Note : Revaluation account is also known as “Profit and Loss Adjustment Account ”.
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Mehtod 2 :
When Question says existing value of assets and liabilities will not be affected and remain in the
future books with same figure.
In such case , profit/loss arise on revaluation of asset & reassessment of liability are not distributed
among old partners at the time of change in profit sharing ratio.
In this case, the gaining partner must compensate the sacrificing partner for the share gained by
him through the following journal entry
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Gaining partner Capital A/c Dr. XXX
-------To Sacrifycing partner capital A/c XXX
(Being adjustment of profit/loss arise on
revaluation of asset & reassessment of liability
made on change in profit sharing ratio)
4
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