What is Change in Profit Sharing Ratio among the Existing Partners?

Change in Profit Sharing Ratio among Existing Partners

There are certain situations apart from retirement or admission of a partner when the existing partners decide about bringing a change in their current ratio of profit sharing. This may result in profits for some partners while some partners may be on the losing side.

In other words, the partners of an enterprise determine to change their current or existing profit sharing ratio without any retirement or admission of a partner. This results in a profit of an additional share in future gains of the enterprise for some partners while a loss of a part thereof for other partners.

(A) Meaning of Reconstitution of a Partnership Firm

 

  • Reconstitution of partnership means a change in existing agreement i.e. mutual terms and conditions among partners.
  • As a result, an old agreement among the partners comes to an end and a new agreement comes into existence.
(B) Circumstances When We Need to Reconstitution of a Partnership Firm
  • Change in profit sharing ratio among the existing partner.
  • Admission of a new partner.
  • Retirement of an existing partner.
  • Death of a partner.
  • The amalgamation of two or more partnership firms.

Change in Profit sharing ratio is one of the popular modes of reconstitution that is followed for bringing about change in the existing ratio of the partners. This change is only about the change in the value of profit-sharing between the partners and does not impact the existence of the partners who are carrying out the business

Any adjustments, in the profit-sharing ratio, be like :

  • Admission of a partner may also incorporate adjustments with respect to the revaluation of liabilities and assets
  • Transfer of accrued profit and losses to partners’ capital A/C’s in the old profit sharing ratio and adjustment of partners’ capitals, if specified, so as to make them commensurate to the new profit sharing ratio
  • Everything is done in a similar way as in the case of admission of a partner

Also, Refer:

Multiple Choice Questions
Q.1- Change in profit-sharing ratio means a change in ratio in which partners of the firm will share future
a. Profit

b. Loss

c. Both (a) & (b)

d. Expenses

Q.2- Reconstruction of the firm takes place at the time of ____________ a partner
a. Death

b. Retirement

c. Admission

d. All of the above

Answer Key
1-c, 2-d

The above mentioned is the concept that is explained in detail about Change in Profit Sharing Ratio among the Existing Partners for the class 12 Commerce students. To know more, stay tuned to BYJU’S.

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