(10) Change in Profit Sharing Ratio
Partnership is the result of an
agreement between persons for sharing the profits of a business. Any change in
the partnership agreement brings to an end the existing agreement and a new
agreement comes into force. The change in the agreement results in changes in
the relationship among the partners. In such a case, although the firm
continues, it amounts to the reconstitution of the partnership firm. Reconstitution of the firm may happen in the following
circumstances:
1) Change in the 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
Change
in Profit Sharing Ratio among the Existing Partners:
Sometimes the existing partners
decide to change their profit sharing ratio. The change is necessitated due to
the change in capital contribution or in active patticipation in management. As
a result of change in profit sharing ratio, one or more of the existing
partners may acquire extra share in profits at the cost of one or more of other
partners. In such a case, in order to maintain equity among the partners, it is
necessary to make adjustments for goodwill, revaluation of assets and liabilities,
reserves, accumulated profit and losses etc. These adjustments are similar to
those made at the time of admission or retirement of a partner.
Adjustments required at
the time of change in the profit sharing ratio:
(1) Determination of Sacrificing
Ratio and Gaining Ratio
(2) Accounting for Goodwill
(3) Accounting Treatment of Reserves
and Accumulated Profits
(4) Accounting for Revaluation of
Assets and Liabilities
(5) Adjustment of Capitals.
Sacrificing
Ratio
Whenever there is a change in the
profit sharing ratio, one or more of the existing partners have to surrender
some of their old share in favour of one or more of other partners. The ratio
of surrender of profit sharing ratio is called sacrificing ratio. It is calculated as follows:
Sacrificing Ratio = Old
Ratio — New Ratio
Gaining Ratio
As a result of change in profit
sharing ratio, one or more of the existing partners gain some portion of other partners
share of profit. The ratio of gain of profit sharing ratio is called gaining
ratio. It is calculated as follows:
Gaining Ratio = New
Ratio — Old Ratio
ILLUSTRATION
X and Y were partners in the ratio
2:1. With effect from 1" April, 2019 they agreed to share profit and
losses equally. Calculate the individual partner's gain or sacrifice due to
change in ratio.
SOLUTION:
Old Ratio = 2:1 New Ratio = 1:1
Sacrifice or Gain
X= 2 - 1 =
4-3 =
1 (Sacrifice)
3 2 6 6
Y= 1 - 1 = 2-3 =
1 (Gain)
3 2 6
6
X has sacrificed 1/6th share
whereas B has gained 1/6th share.
