Accountancy for sure

Class XII Accountancy
Partnership Accounts

Change in Profit Sharing Ratio of Existing Partners

Treatment of Workmen Compensation Reserves and Workmen Compensation Claim.

Solution 12,13 and 14

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Change in Profit sharing Ratio: A Crucial Aspect of Business Management

Profit sharing is a common practice in businesses where the profit earned is distributed among the partners or shareholders. It serves as a motivation for the individuals involved and encourages them to work towards the growth and success of the organization. However, there may be instances where the profit sharing ratio needs to be altered to reflect the changing dynamics of the business. In this article, we will discuss the concept of change in profit sharing ratio using examples from TS Grewal’s Solutions 12, 13, and 14 of the Workmen Compensation Res. Cha 4.

Profit sharing ratio refers to the proportion in which the profits of a business are distributed among the partners or shareholders. This ratio is determined by mutual agreement between the parties involved and is mentioned in the partnership deed or agreement. It is usually based on factors such as the capital invested, time and effort contributed, and the risk borne by each partner.

However, as an organization evolves and faces new challenges, the existing profit sharing ratio may no longer be appropriate. Changes in the business environment, market conditions, or the individual contributions of the partners can all influence the need for a modification in the profit sharing ratio.

Let’s consider Solution 12 of T.S Grewal’s textbook. It explains a scenario where two partners, A and B, decide to change their existing profit sharing ratio from 3:2 to 2:3 due to B’s increased involvement and contribution to the business. This change reflects the partners’ acknowledgment of the new dynamics of their partnership and ensures a more fair distribution of profits that reflects their individual efforts.

Solution 13 discusses a case where partners A, B, and C have been sharing profits in the ratio of 3:2:1. Here, partner C retires, and a new partner, D, enters the business. The existing partners agree to revise the profit sharing ratio into 3:2:2 to include the new partner’s investment and contribution. This alteration ensures that the profits are distributed among the partners in a manner that reflects their respective share in the business.

Another example can be found in Solution 14, which showcases a partnership firm with two partners, A and B, sharing profits in the ratio of 3:2. A new partner, C, is admitted, and the partners agree to change the profit sharing ratio to 3:1:1 due to the new partner’s investment and contribution. This shift is essential to maintain a harmonious and equitable relationship among the partners while adapting to the changes that come with the inclusion of new members.

In each of these solutions, the change in profit sharing ratio is a strategic decision made by the partners to accurately reflect their current business dynamics and contributions. It ensures transparency, fairness, and mutual understanding among the partners, strengthening the overall partnership and contributing to the long-term success of the business.

In conclusion, the profit sharing ratio is a crucial aspect of business management, and changes to it are necessary when circumstances and contributions warrant it. As showcased in the examples from T.S Grewal’s Solutions, altering the profit sharing ratio requires mutual consent and understanding among the partners. It is a proactive measure that allows the partners to adapt to the changing dynamics of the business and ensures a fair distribution of profits that aligns with the efforts and investments made.