• 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.

Download App

Download Extramarks – The Learning App

Take your CBSE board preparation to another level with AI based and rich media animation on Extramarks - The Learning App.

Features of Learning App

  • Learn with studybot “Alex”
  • Personalized Learning journey
  • Unlimited doubt Solving
  • Quiz, challenge friends
  • Leaderboard Ranking
  • Academic Guru

Download App Download App