CHANGE IN PROFIT SHARING RATIO: ISSUES ARISING ON CHANGE IN PROFIT SHARING RATIO AMONG EXISTING PARTNERS

Yes No Reserves, Accumulated Revaluation of Assets and

New PSR Goodwill Adjustment of Capital
Profits and Losses Reassessment of Liabilities
Given

Calculate the adjusted capital of

Find Sacrificing/ Sacrificing Gaining Ratio Yes Same values No Yes Same values No partners after all adjustments
Gaining Ratio Ratio Given Given to be carried to be carried
forward forward
Calculate total capital of New
Sacrificing Ratio = Find New PSR: Find New PSR: Determine the net effect firm (if not given) as under:
Old Ratio minus Old Ratio minus Old Ratio plus and adjust through Total capital = Aggregate of
Partners’ Capital/Current Distribute in Determine the net effect of Prepare adjusted capitals of partners
New Ratio Sacrificing Ratio Gaining Ratio
Accounts using Sacrificing Old PSR Increase/Decrease and adjust Revaluation A/c
Gaining Ratio = and Gaining Ratio net effect through Partners’
New Ratio minus Capital/Current A/cs using Calculate the new capital of
Old Ratio Sacrificing and Gaining Ratio each partner as under: Total
Valuation of Goodwill In Case of Reserves and capital of new firm × New share
(Refer to Chapter - 3) Accumulated Profits:
Gaining Partners’ Capital/
In case Capital of an individual
Current A/cs ...Dr. Gaining Partners’ Capital/
To Sacrificing Partners’ Capital/Current A/cs Partner after all adjustments is
Accounting Treatment of Goodwill Current A/cs ...Dr.
In Case of Accumulated Losses: less than his New Capital:
Reverse Entry of the above is passed To Sacrificing Partners’
Cash/Bank A/c or Concerned
Capital/Current A/cs
Write Partner’s Current A/c ...Dr.
Goodwill Yes
No off existing To Concerned Partner’s Capital A/c
exists in
books Goodwill
In Case of Reserves and Debit it by: In case Capital of an individual
Accumulated Profits: Decrease in value of Assets and Partner after all adjustments is
Adjust Current value of All Partners’ Capital/Current A/cs ...Dr. Increase in amount of Liabilities
Reserves/Accumulated more than his New Capital:
goodwill giving credit to (In old ratio)
Profits A/c ...Dr. Credit it by:
Sacrificing Partners and To Goodwill A/c (with existing value To All Partners’ Capital/ Concerned Partner's
Increase in value of Assets and
debit to Gaining Partners of Goodwill) Current A/cs Decrease in amount of Liabilities Capital A/c ...Dr.
In Case of Accumulated Losses: To Cash/Bank A/c or Concerned
Adjust Current value of goodwill giving credit to Reverse Entry of the above Partner's Current A/c
Sacrificing Partners and debit to Gaining Partners is passed
Determine Gain/Loss
Gaining Partners’ Capital/Current A/cs ...Dr.
In case of Gain (Profit):
To Sacrificing Partners’ Capital A/cs
Or Revaluation A/c ...Dr.
Goodwill A/c ...Dr. Distribute Gain (Profit) To All Partners’ Capital/Current A/cs
To All Partners’ Capital/Current A/cs or Loss in Old PSR In Case of Loss:
(in Old PSR) All Partners’ Capital/Current A/cs ...Dr.
Continuing Partners’ Capital/Current A/cs ...Dr. To Revaluation A/c
Abbreviation Used: (in New PSR)
PSR—Profit-sharing Ratio To Goodwill A/c