How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
Change in the profit sharing ratio occurs only in case of the admission, retirement or death of a partner or sometimes due to the general agreement among the partners in which they may decide to change the profit sharing ratio. There may be number of issues that should be considered during the change in the profit sharing ratio such as goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capital, etc.
As far as the issue related to general reserve is concerned it is basically the accumulated profits (if any) and profit (or loss) on revaluation of assets and liabilities and should be distributed in the partner's capital account in partners old profit sharing ratio. Sometimes the existing partners may decide to change the profit sharing ratio then some partners gain at the cost of other partners. In other words one partner gain and other one sacrifice equal to the gain. In that case the former should compensate the later. Therefore, the gaining partner's capital account's are debited to the extent of their gain and sacrificing partner's capital accounts are credited to extent of their sacrifice. The following Journal entry is passed.
DateParticularsLFAmt. (Dr)Amt. (Cr)Gaining Partner's Capital A/cDr To Sacrificing Partner's Capital A/c(Adjustment entry passed with thedifference figure)
Change in the profit sharing ratio occurs only in case of the admission, retirement or death of a partner or sometimes due to the general agreement among the partners in which they may decide to change the profit sharing ratio. There may be number of issues that should be considered during the change in the profit sharing ratio such as goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capital, etc.
As far as the issue related to general reserve is concerned it is basically the accumulated profits (if any) and profit (or loss) on revaluation of assets and liabilities and should be distributed in the partner's capital account in partners old profit sharing ratio. Sometimes the existing partners may decide to change the profit sharing ratio then some partners gain at the cost of other partners. In other words one partner gain and other one sacrifice equal to the gain. In that case the former should compensate the later. Therefore, the gaining partner's capital account's are debited to the extent of their gain and sacrificing partner's capital accounts are credited to extent of their sacrifice. The following Journal entry is passed.
DateParticularsLFAmt. (Dr)Amt. (Cr)Gaining Partner's Capital A/cDr To Sacrificing Partner's Capital A/c(Adjustment entry passed with thedifference figure)
