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Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 4]

Learning Concept:
1. Capitalisation Method
(a) Capitalisation of Average Profit
(b) Capilisation of Super Profit
2. Question of Capitalisation Method.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 1]

Learning Concept:
1. Meaning of Reconstitution of Partnership.
2. Reasons of Reconstitution of Partnership.
3. Meaning of Change in Profit Sharing Ratio.
4. Meaning of Sacrificing Ratio and Gaining Ratio.
5. Calculation of Sacrificing Ratio and Gaining Ratio.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 2]

Learning Concept:
1. Meaning of Goodwill.
2. Methods of Goodwill.
3. Meaning of Number of Year’s Purchase.
4. Calculation of Goodwill by Average Profit Method.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 3]

Learning Concept:
1. Meaning of Super Profit.
2. Use of Super Profit Method.
3. Question of Super Profit Method.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 5]

Learning Concept:
1. Accounting Treatment of Goodwill.
2. Rules for Treatment of Goodwill.
3. Question of Goodwill.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 6]

Learning Concept:
1. Treatment of Accumulated Profits and Reserve.
2. Question of Accumulated Profits and Reserve.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 7]

Learning Concept:
1. Treatment of Accumulated Profits and Reserve by Adjustment Entry.
2. Question of Accumulated Profits and Reserve.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 8]

Learning Concept:
1. Meaning of Revaluation Account.
2. Methods of Solving Revaluation Account.
3. Treatment of Revaluation Account.
4. Question of Revaluation Account and Revised Balance Sheet.

Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 9]

Learning Concept:
1. Treatment of Revaluation Account When Balance Sheet Not Changed.
2. Question of Revaluation Account When Balance Sheet Not Changed.

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Class – XII Chapter – 2 Change in Profit Sharing Ratio [Part – 4]

In the last article, we discussed the various situations that may lead to a change in the profit-sharing ratio of a partnership, such as the admission of a new partner, the retirement of an existing partner, or the death of a partner. We also explored the important concepts related to these situations. In this article, we will further expand our knowledge on this topic.

Sometimes, a partnership may decide to change the profit-sharing ratio among existing partners without any admission, retirement, or death of partners. This can happen due to various reasons, such as changes in the business environment, differences in the contribution of partners towards the growth of the business, or the need to incentivize certain partners for their exceptional performance.

When the partners decide to alter the existing profit-sharing ratio, it is important to follow a systematic procedure to ensure fairness and transparency. Here are the key steps involved in changing the profit-sharing ratio among existing partners:

1. Discussion and Agreement: The partners should discuss and agree upon the need to change the profit-sharing ratio. It is important to consider all the factors that warrant a change and come to a mutual understanding.

2. Valuation of Goodwill: The next step is to value the goodwill of the business. Goodwill represents the reputation, customer loyalty, and brand value of the partnership. A professional valuer may be hired to determine the fair value of goodwill.

3. Adjustment of Capital Accounts: The partners’ capital accounts should be adjusted to reflect the new profit-sharing ratio. This is done by transferring or withdrawing capital from the respective partners’ accounts, depending on the agreed-upon ratio.

4. Distribution of Revaluation Profits or Losses: If the change in the profit-sharing ratio results in a revaluation of assets and liabilities, the profits or losses arising from the revaluation should be distributed among the partners according to their new profit-sharing ratio.

5. Distribution of Share in Goodwill: If there is an increase or decrease in the value of goodwill due to the change in the profit-sharing ratio, the partners should distribute their share in the goodwill. This is done by crediting or debiting the respective partners’ capital accounts.

6. Journal Entries: All the necessary journal entries should be recorded to reflect the changes in capital accounts, revaluation profits/losses, and goodwill distribution. These entries ensure that the changes are properly accounted for in the partnership’s financial books.

7. Mutual Consent: It is crucial to obtain the mutual consent of all the partners regarding the changes in the profit-sharing ratio. This helps in maintaining harmony and trust among the partners.

Changing the profit-sharing ratio among existing partners requires careful consideration and adherence to accounting principles. It is crucial to consult a professional accountant or seek guidance from the textbook to ensure accuracy and fairness in the process.

By understanding and applying the principles of changing the profit-sharing ratio, partnerships can adapt to changing circumstances, reward exceptional contribution, and maintain a healthy and profitable business.