Adjustment of accumulated Profits || Change in Profit Sharing Ratio || Accountancy || Class 12

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Chapter: Change in Profit Sharing Ratio Among the Existing Partners
Meaning
When the partners of a firm decide to change their existing profit-sharing ratio without changing the constitution of the firm (i.e., no admission, retirement, or death), it is called a change in profit-sharing ratio.

Common Reasons for Change
Change in contribution of capital.
change in roles/responsibilities of partners.
Desire for a more equitable distribution of profits/losses.
Key Adjustments Required
Sacrificing Ratio
Formula:
Sacrificing Ratio = Old Ratio – New Ratio

Used when one partner gives up a share of profit to another.

Gaining Ratio
Formula:
Gaining Ratio = New Ratio – Old Ratio

Shows the share of profit gained by a partner due to the change.

Accounting Adjustments
When the ratio changes, some items in the books need to be adjusted:

1. Goodwill Adjustment
The gaining partner compensates the sacrificing partner.

Journal entry (if goodwill is not appearing in books):
Gaining Partner’s Capital A/c Dr.
To Sacrificing Partner’s Capital A/c
2. Revaluation of Assets and Liabilities
Optional.

If done, prepare:

Revaluation Account

Partners’ Capital Accounts

3. Reserves and Accumulated Profits/Losses
These are distributed among partners in the old ratio before the change.

Example: General Reserve, Profit and Loss A/c (Credit Balance).