Change In Profit Sharing Ratio PDF

1 Change in profit Chapter 3 sharing ratio 1. RECONSTITUTION OF FIRM Meaning Reconstitution of firm means any...

1 Change in profit Chapter 3 sharing ratio 1. RECONSTITUTION OF FIRM Meaning Reconstitution of firm means any change in agreement between the partners. When takes 1. Change in profit sharing ratio. place 2. Admission of new partner. 3. Retirement and death of partner. 4. Sale of firm. 5. Amalgamation of firm. Gaining Partner Gaining partner is the partner whose share in profit increases as a result of Reconstitution of the firm. Sacrificing Sacrificing partner is the partner whose share in profit Partner decreases as a result of reconstitution of the firm. New Profit – The ratio in which the partners are to share the profits in Sharing Ratio future is known as the New Profit – Sharing Ratio. Gaining Ratio It is the ratio in which the profit – sharing ratio of the gaining partners increases.(new ratio –old ratio) Sacrificing Ratio It is the ratio in which the profit – sharing ratio of the sacrificing partner decreases.(old ratio – new ratio) 2. CHANGE IN PROFIT SHARING RATIO Meaning Change in the profit – sharing ratio among existing partners means it is a reconstitution of the firm without admission of a new partners (s) or retirement or death of a partner. In other words, “Change in profit sharing ratio means Purchase of share of profit from one Partner by other. Need 1. When the partners so decide 2. Change in profit sharing ratio 3. Admission and new partner 4. Retirement and death of partner 5. Sale of firm 6. Amalgamation of firm 1. Determination of Sacrificing Ratio and Gaining Ratio, Adjustment for 2. Accounting Treatment of Goodwill. Change in the 3. Accounting Treatment of Accumulated Profits and Profit – Sharing Reserves. Ratio 4. Revaluation of Assets and Reassessment of Liabilities and 5. Adjustment of Capitals.  2 Accounting treatment of Goodwill (In case of change in profit sharing ratio) Case 1 WHEN THEY WANT TO OPEN GOODWILL ACCOUNT( OR GOODWILL IS RAISED AND WRITTEN OFF) 1) Goodwill A/c Dr. To Old Partner’s Capital A/c (Being Goodwill Raised) 2) New Partner’s Capital A/c Dr. To Goodwill A/c (Being Goodwill Written off) Case 2 WHEN THEY DON’T WANT TO OPEN GOODWILL ACCOUNT (OR GOODWILL IS TREATED THROUGH PARTNERS CAPITAL ACCOUNT) Gaining Partner’s Capital A/cs Dr. (in gaining ratio) To Sacrificing Partner’s Capital A/cs (Being the adjustment made for goodwill) Investment Fluctuation Reserve A/C Dr. General Reserve|Reserve Fund|ReserveA/C Dr. Workmen’s compensation Fund A/C Dr. Profit & Loss Account (Cr.) A/c Dr. To OLD Partner’s Capital A/C (Being the accumulated Profit transferred……) Accounting treatment of Reserves/Accumulated Profit Accumulated Losses (In case of change in profit sharing ratio) Case 1 WHEN THE PARTNERS DECIDED TO DISTRIBUTE (WHEN THEY DON’T WANT TO SHOW IN NEW B/S) For Reserve/ Investment Fluctuation Reserve A/C Dr. Accumulated Profit General Reserve|Reserve Fund|ReserveA/C Dr. Workmen’s compensation Fund A/C Dr. Profit & Loss Account (Cr.) A/c Dr. Contingency Reserve A/c Dr. To OLD Partner’s Capital A/C (Being the accumulated Profit transferred……) For accumulated Old Partner’s Capital Account Dr. losses To Profit & Loss Account (loss) A/C To Advertisement suspense A/C (Being losses transferred in old Ratio) Case 2 WHEN THE PARTNERS DECIDED NOT TO BE DISTRIBUTE. (WHEN THEY WANT TO SHOW IN NEW B/S) For Reserve/ Gaining Partner’s Capital A/c Dr. Accumulated Profit To Sacrificing Partner’s Capital A/c (Being the Adjustment entry for Reserve passed) For accumulated Sacrificing Partners Capital A/c Dr. losses To Gaining Partner’s Capital A/c (Being the adjustment entry for accumulated loss passed)  3 ACCOUNTING TREATMENT FOR REVALUATION OF ASSETS AND LIABILITIES : Case 1: WHEN PARTNERS DECIDED TO SHOW ALTER (CHANGED/NEW) VALUE IN NEW BALANCE SHEET. Or WHEN REVALUATION ACCOUNT IS OPENED REVALUATION ACCOUNT The increase and decrease in the value of assets and liabilities are effected though Revaluation account or profit loss adjustment account. Profit or loss arises due to revaluation of assets and liabilities is distributed among the partners in their old profit sharing ratio. (1) Revaluation A/c Dr To increase in liab To decrease in Assets To unrecorded liab. (2) Increase in Assets A/C Dr Decrease in liab. A/C Dr unrecorded Assets A/C Dr To Revaluation A/C (3) For Profit :- for loss :- Revaluation A/C Dr Partner’s capital A/C Dr. To partner’s capital A/C To Revaluation A/C (In old Ratio) (In old Ratio) Dr. Revaluation Account Cr. Particular Amount Particulars Amount To Increase in liability By Increase in Assets To Decrease in Assets By Decrease in liability To Unrecorded liability By Unrecorded Assets To Profit transferred to : By Loss transferred to : A - (OR) A - (OR) B - B - Case 2: WHEN PARTNERS DECIDED NOT TO SHOW ALTER (CHANGED/NEW) VALUE IN NEW BALANCE SHEET. Or WHEN REVALUATION ACCOUNT IS NOT OPENED 1) For Profit on Revaluation Gaining Partner’s Capital A/c Dr. To sacrificing partner’s capital A/c 2) For Loss on Revaluation Sacrificing Partner’s Capital A/c Dr. To Gaining Partner’s capital A/c