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Accountancy > Admission of a Partner > Adjustment of Capital and Change in Profit Sharing Ratio Among Existing Partners
Admission of a Partner

Adjustment of Capital and Change in Profit Sharing Ratio Among Existing Partners

One of the forms of reconstitution of the firm is Change in Profit Sharing Ratio among Existing Partners. Here there is no change in the partners carrying on the business of the firm. The only change is the profit sharing ratio among existing partners.

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Change in Profit Sharing Ratio among Existing Partners

Change in Profit Sharing Ratio Among Existing Partners

Without any admission or retirement of the partner, sometimes the partners may decide to change their existing profit sharing ratio. This may result in the gain to a few partners and loss to others. The partners who are in profit due to this change should compensate the sacrificing partner/partners in the profit sharing ratio.

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New Profit Sharing Ratio

The ratio at which the partners decide to share profits/losses in future.

Sacrificing Ratio

The ratio in which the partners have agreed to sacrifice their share of profit in favour of other partners.

Sacrificing ratio = Old Ratio – New Ratio

Gaining Ratio

The ratio in which the partners have agreed to gain their share of profit from other partners.

Gaining ratio = New Ratio – Old Ratio

Subsequent Adjustments

Hence for this purpose, in the books of the firm, few adjustments are made. These adjustments are:-

  1. Revaluation of assets and liabilities;
  2. Adjustments of reserves accumulated profits, and losses if any etc.
  3. Adjustment for goodwill

Adjustment for Goodwill

At the time of reconstitution of a firm, Goodwill is also one of the special aspects which require adjustment. The gaining partner pays the sacrificing partner the proportionate share of goodwill which is equal to share gained by him

Revaluation of Assets and Liabilities

At the time of reconstitution of the firm, re-valuation of the assets and liabilities is done. Revaluation of assets and re-assessment of liabilities is done because:

  • To bring the assets and liabilities at their correct values in the books
  • Unrecorded assets and liabilities of the firm are brought into the books of the firm
  • To ascertain the actual position of the firm.
  • Profit and loss arriving on account of such revaluation up to the date of reconstitution may be adjusted in the partner’s capital accounts in their sacrificing ratio

Adjustments of Reserves, Accumulated Profits, and Losses

Any reserves or accumulated profits/losses appearing on the balance sheet should be transferred to the partner’s capital accounts. If the partners decide to leave them undisturbed it is necessary to make an adjustment entry in the books of the firm. In that case, the share gained by the gaining partner, he must compensate the sacrificing partner that share of profits and reserves which is proportionate to him.

Solved Example for You

Q: Profit and losses ratio is for 3:2:1, for A, B and C respectively. From 1st April 2018, they decide to share profit and losses equally. Value of Goodwill of the firm is Rs 24000. Calculate sacrificing and gaining ratio. Also, pass necessary journal entry.

Solution:

Old ratio: 3:2:1

New ratio: 1:1:1

Sacrificing or gaining ratio= Old ratio – New ratio

A’s share= 3/6 – 1/3 = -1/6 (sacrifice)

B’s share= 2/6 – 1/3 = Nil

C’s share= 1/6 – 1/3 = 1/6 (Gain)

Goodwill of the firm= Rs 24000

A will receive for goodwill = 24000*1/6 = Rs 4000

C will give for goodwill =24000*1/6 = Rs 4000

Journal

Date Particulars   L.F Amount Amount
April 01 C’s Capital a/c Dr. 4000
To A’s Capital a/c 4000
(being an adjustment of goodwill made on the change in profit sharing ratio)

 

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Kanaka
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Kanaka

to transfer deceased partner share to his legal heirs will it attract stamp duty

Raghavendra Bhat
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Raghavendra Bhat

We have a partnership firm with three partners without any immovable property. Our partnership ratios are 46%, 34% and 20%. The partnership is at will. Now the 34% partner has decided to move on without any immovable property. Retirement Deed has been signed too and the goodwill amount is already paid. This results in Reconstitution of the firm including the retirement of a partner and change in the partnership ratio of the two continuing partners (74% and 26% respectively). Do we need to submit two different Form 5s to the Registrar of Firms (along with the deed of retirement)?

Samyak
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Samyak

Is goodwill of firm distributed among existing partners without any admission retirement or death??

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