Chapter:2

What are Change in the Profit Sharing Ratio?

Change In The Profit Sharing Ratio Among The Existing Partners

A change in profit sharing ratio among existing partners means, one or more partners acquires share of profit in the business from another partner(s). It results into reconstitution of the firm.

Sacrificing Ratio

  • Sacrificing Ratio is the ratio in which one or more partners of the firm have agreed to sacrifice their share of profits in favour of one or more partners of a firm.
    Sacrificing Ratio = Old Ratio – New Ratio

Gaining Ratio

  • Gaining Ratio means the share of profit gained by one or more partners as a result of sacrificed share in profits by one or more partners of the firm.
    Gaining Ratio = New Ratio – Old Ratio

Accounting For Revaluation Of Assets And Reassessment Of Liabilities

At the time of the reconstitution of the partnership firm, the actions related to the revaluation of assets and reassessment of liabilities are taken and the number of changes is to be distributed among the partners’ in their old profit sharing ratio.

The partners may decide to:
• record revised values of assets and liabilities in the books of the firm; or
• not to record revised values of assets and liabilities in the book of the firm.

(1) When Revised Values of Assets and Liabilities are to be Recorded

The following journal entires are passed:–

(a) For increase in the value of asset:
Asset A/c (Individually) To Revaluation A/c Dr.
To Revaluation A/c
(Being adjustment made for the increase in the value of asset)
(b) For decrease in the value of asset:
Revaluation A/c Dr.
To Asset A/c (Individually)
(Being adjustment made for the decrease in the value of asset)
(c) For increase in the value of Liability:
Revaluation A/c Dr.
To Liability A/c (Individually)
(Being adjustment made for the increase in the value of liability)
(d) For decrease in the value of Liability:
Liability A/c (Individually) Dr.
To Revaluation A/c
(Being adjustment made for the decrease in the value of liability)
(e) For the recording of unrecorded asset:
Unrecorded Asset A/c Dr.
To Revaluation A/c
(Being adjustment made for the recording of unrecorded asset)
(f) For the recording of unrecorded liability:
Revaluation A/c Dr.
To Unrecorded liability A/c
(Being adjustment made for the recording of unrecorded liability)
(g) For transfer of Balance in Revaluation Account:
1. If total of credit side exceeds total of debit side (Net Gain):
Revaluation A/c Dr.
To Partner’s capital/current A/cs [In old profit sharing ratio]
(Being profit on revaluation transferred to capital accounts of partners)
2. If total of debit side exceeds total of credit side (Net Loss):
Partners’ capital/current A/cs Dr. [In old profit sharing ratio]
To Revaluation A/c
(Being loss on revaluation transfered to capital accounts of partners)

Format of Revaluation Account

Dr.

Revaluation Account

Cr.

Particulars Amount
(₹)
Particulars Amount
(₹)
To Assets A/c (Individually) By Assets A/c (Individually)
(Decrease in value) ××× (Increase in value) ×××
To Liabilities A/c (Individually) By Liabilities A/c (Individually)
(Increase in Amount) ××× (Decrease in Amount) ×××
To Unrecorded Liabilities A/c ××× By Unrecorded Assets A/c ×××
To Partners’ capital A/c By Loss on Revaluation transferred to
(Remuneration) ××× Partner’s capital/current A/cs ×××
To Cash/Bank A/c (Expenses for Reconstitution) ×××
To Profit on Revaluation transferred to
Partners’ capital/current A/cs ×××
××× ×××

(2) When Revised Values Of Assets And Liabilities Are Not To Be Recorded

Following steps are taken, when revised values of assets and liabilities are not recorded by the firm:

Step 1: Calculation of Net Effect of Revaluation:

Particulars Amount (₹)
(i) Increase in value of assets ×××
(ii) Add: Decrease in amount of liabilities ×××
(iii) Less: Decrease in value of assets ×××
(iv) Less: Increase in amount of liabilities ×××
Net effect of revaluation ×××

Step 2: Find Share of Sacrifice/(Gain) of Each Partner:

Particulars A (₹) B (₹) C (₹)
(i) Old Ratio ××× ××× ×××
(ii) New Ratio ××× ××× ×××
Sacrifice/(Gain) (i – ii) ××× ××× ×××

Step 3: Calculation of Proportionate Amount of Net Effect of Revaluation:

For Gaining Partner = Share Gained × Net Effect of Revaluation
For Sacrificing Partner = Share Sacrificed × Net Effect of Revaluation

Step 4: Pass the following Journal Entry:

• For Profit on Revaluation:
Gaining Partners’ Capital/Current A/cs Dr.
To Sacrificing Partners’ Capital/Current A/cs
• For Profit on Revaluation:
Sacrificing Partners’ Capital/Current A/cs Dr.
To Gaining Partners’ Capital/Current A/cs

Accounting Treatment Of Reserves, Accumulated Profits And Losses

Journal entry for transfer of Reserves and Accumulated Profit:

Reserve A/c Dr.
Profit and Loss A/c (Cr. Balance) Dr.
Profit and Loss A/c (Cr. Balance) Dr.
Workmen Compensation Reserve A/c Dr. [Excess of Reserve over Liability]
Investments Fluctuation Reserve A/c Dr. [Excess of Reserve over the difference between Book value and Market value]
To All Partners’ Capital/Current A/cs [In Old Ratio]

Journal entry for transfer of Accumulated Losses:

All Partners’ Capital/Current A/cs Dr. [In Old Ratio]
To Profit and Loss A/c (Dr. Balance)
To Deferred Revenue Expenditure A/c [Say, Advertisement Suspense Account]