Change in Profit Sharing Ratio

  • The alteration in profit sharing ratio among existing partners in a partnership business is known aschange in profit sharing ratio.
  • Any change in profit sharing ratio involves an increase in share of profit of one or more partners and decrease in share of profit of another partners.
  • Partners whose shares have decreased due to a change in the profit sharing ratio are known as Sacrificing partners.
  • Partners whose shares have increased due to change in the profit sharing ratio are known as Gaining partners.
  • Reconstitution means change in the profit-sharing ratio amongst existing partners.
  • A firm can be reconstituted at the time of change in profit sharing ratio among existing partners, admission, retirement or death of a partner and amalgamation.
  • PSR should be divided equally in the absence of partnership deed or any other agreement regarding sharing of profit and losses.
  • Adjustments required in event of changing profit sharing ratio of partners, are: calculation of gaining ratio and sacrificing ratio, accounting treatment of goodwill, adjustment of reserves and accumulated profits/losses, revaluation of assets and liabilities.
  • Sacrificing ratio refers to that part of old ratio that is surrendered in favour of other partners.
  • Gaining ratio is calculated to determine the amount of compensation to be paid. In the treatment of goodwill, sacrificing partners are compensated by gaining partners and compensation is calculated on the basis of sacrifice.
  • Revaluation is the valuation of assets and liabilities at the time of reconstitution of the firm.
  • When assets or liabilities are to be shown at their original value then single adjusting entry is passed.
  • Reconstitution of firm may require capitals of the partners in the new firm to be in accordance with their profit sharing ratio.

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  • Q1

    A, B and C were partners sharing profits in the ratio 2:3:4. They agreed to share future profits in the ratio 3:4:5. The net effect of change is

    Marks:1
    Answer:

    A gain 1/36; B Nil; C sacrifice 1/36.

    Explanation:

    Sacrifice = Old share – New share

    A = 2/9 – 3/12 = 1/36

    B = 3/9 – 4/12 = NIL

    C = 4/9 – 5/12 = 1/36

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  • Q2

    Which of the following adjustment is not required at the time of change in profit sharing ratio

    Marks:1
    Answer:

    None of the above

    Explanation:

    Following adjustments are required at the time of change in profit sharing ratio

    1) Adjustment in profit sharing ratio by determining sacrificing/gaining ratio

    2) Adjustment of goodwill

    3) Adjustment due to revaluation of assets and liabilities

    4) Adjustment of accumulated reserves/ profits and so on

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  • Q3

    The partners whose shares have reduced as a result of change in the profit sharing ratio are called

    Marks:1
    Answer:

    sacrificing partners.

    Explanation:
    The partners whose shares have decreased as a result of change in the profit sharing ratio are called sacrificing partners and the ratio in which the partners have agreed to sacrifice their shares in profit in favour of other partner or partners, is known as sacrificing ratio.
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  • Q4

    In case of a change in profit sharing ratio of the existing partners, the gaining partners compensate

    Marks:1
    Answer:

    sacrificing partners.

    Explanation:
    The gaining partners should compensate the sacrificing partners in case of change in profit sharing ratio. The share will be purchased in exchange of goodwill.
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  • Q5

    If, the partners of a firm decide to change their profit sharing ratio, the gaining partner must compensate the sacrificing partner by paying the proportionate amount, of

    Marks:1
    Answer:

    premium for goodwill.

    Explanation:
    Goodwill is paid, when some partners sacrifices for the others.
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