ACCOUNTING TUTOR AT KOTA

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

+91 7891761847
1

CHAPTER 2 Reconstitution of a Partnership Firm: Change in Profit Sharing Ratio Among the Existing Partners By C.P. Chaudhary +91 7891761847

KNOWLEDGE IS POWER BUT ACTION GETS THINGS DONE

ACCOUNTING TUTOR AT KOTA

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

+91 7891761847
2

Reconstitution of a Partnership firm new partnership agreement conditions :-

partnership agreement Reconstitution of a Partnership

end firm 5

(1) Change in profit sharing ratio among the existing partners (2) Admission of a new partner (3) Retirement of an existing partner (4) Death of a partner (5) Amalgamation of two partnership firms
:-

chapter Change in profit sharing ratio among the existing partners existing partners ratio change following adjustment required

(1) Determination of sacrificing ratio & Gaining ratio Sacrificing Ratio = Old Ratio New Ratio Gaining Ratio = New Ratio Old Ratio (2) Valuation & Accounting for Goodwill (A)Methods of Valuation of Goodwill: Goodwill calculate (a) Average Profit Method: Goodwill calculate (i) Simple Average Profit Method Step1: Total profit calculate
Add all the profits

3 :-

:-

Step2: Average profit calculate Average Profit =

(ii)

Step3: Goodwill calculate Goodwill = Average Profit Number of Years of Purchase Weighted Average Profit Method Year Profits (x) Weights (y) Products (xy)

Step1: Weighted average profit calculate Weighted Average Profit =

KNOWLEDGE IS POWER BUT ACTION GETS THINGS DONE

ACCOUNTING TUTOR AT KOTA

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

+91 7891761847
3

Step2: Goodwill calculate Goodwill = Weighted Average Profit Number of Years of Purchase (b) Super Profit Method: Step1: Calculate Average Profit Average Profit = Step2: Calculate Normal Profit Normal Profit = Capital Invested Step3: Calculate Super Profit Super Profit = Average Profit Normal Profit Step4: Calculate Goodwill Goodwill = Super Profit Number of Years of Purchase (c) Capitalisation Method: (i) Capitalisation of Average Profit Method Step1: Calculate Average Profit Average Profit = Step2: Calculate capitalized value of Average Profits Capitalised value of Average Profits = Average Profits Step3: Calculate Capital Employed Capital Employed = Tangible Assets Outside Liabilities Step4: Calculate Goodwill Goodwill = Capitalised value of Average Profits Capital Employed Capitalisation of Super Profit Method Step1: Calculate Average Profit Average Profit = Step2: Calculate Normal Profit Normal Profit = Capital Invested Step3: Calculate Super Profit Super Profit = Average Profit Normal Profit Step4: Calculate Goodwill Goodwill = Super Profit

(ii)

KNOWLEDGE IS POWER BUT ACTION GETS THINGS DONE

ACCOUNTING TUTOR AT KOTA

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

+91 7891761847
4

(B) Accounting Treatment of Goodwill Goodwill gaining & sacrificing ratio distribute Journal entry pass Gaining Partners Capital a/c Dr. To Sacrificing Partners Capital a/c (3) Accounting treatment of Reserves & Accumulated Profits (A) When Reserves & Accumulated Profits/ Losses are to be transferred to Capital Accounts: (a) For transfer of reserves and accumulated profits, Journal entry pass All Reserves a/c Dr. (Individual) Profit & Loss a/c Dr. In Old Ratio To All Partners Capital/ Current a/c (b) For transfer of accumulated losses, Journal entry pass All Partners Capital/ Current a/c Dr. To Profit & Loss a/c To Deferred Revenue Expenditure a/c (B) When Reserves & Accumulated Profits/ Losses are not to be transferred to Capital Accounts: condition goodwill treatment ki treatment Journal entry pass Gaining Partners Capital a/c Dr. To Sacrificing Partners Capital a/c In gaining & sacrificing ratio (4) Accounting for Revaluation of Assets & Liabilities Revaluation of assets and liabilities assets and liabilities
Revaluation Account or Profit & Loss Adjustment Account

reconstitution

value

Following journal entry will be passed:

(a) For decrease in the value of assets: Revaluation a/c Dr. To Assets a/c (b) For increase in the value of assets: Assets a/c Dr. To Revaluation a/c (c) For unrecorded value of assets: Assets a/c Dr. To Revaluation a/c (d) For increase in the value of liabilities: Revaluation a/c Dr. To Liabilities a/c

KNOWLEDGE IS POWER BUT ACTION GETS THINGS DONE

ACCOUNTING TUTOR AT KOTA

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

+91 7891761847
5

(e) For decrease in the value of liabilities: Liabilities a/c Dr. To Revaluation a/c (f) For unrecorded value of liabilities: Revaluation a/c Dr. To Liabilities a/c Revaluation Account
Profit or Loss distribute condition

(A) When revised values are to be recorded in the books: Following journal entry will be passed:(a) For Profit Revaluation a/c Dr. To Partners Capital A/cs (b) For Loss Partners Capital A/cs Dr. To Revaluation a/c (B) When revised values are not to be recorded in the books: Following journal entry will be passed for profit or loss: Gaining Partners Capital a/c Dr. To Sacrificing Partners Capital a/c (5) Accounts to be prepared (A)Revaluation Account Revaluation Account Particulars Amount Particulars Amount To Decrease in the value of assets By Increase in the value of assets To Increase in the value of liabilities By Decrease in the value of liabilities To Unrecorded liabilities By Unrecorded assets To Profit on Revaluation transferred To Loss on Revaluation transferred To partners capital a/c (In old ratio) To partners capital a/c (In old ratio)

(B) Partners Capital Accounts: Partners Capital Accounts should be prepared according to the conditions given in the question. Format will be the same as mentioned in the previous chapter. (C)Balance Sheet: Balance sheet should be prepared according to the question.

KNOWLEDGE IS POWER BUT ACTION GETS THINGS DONE