Change in the profit sharing ratio of the existing partners

Change in the profit sharing ratio of the existing partners

 

Sometimes it is decided by the existing partners to change their Profit sharing ratio. This change may result in gain to a few partners and loss to others. The partners who are going to gain due to this change in the profit sharing ratio should compensate the sacrificing partner/partners. Hence for this purpose a few adjustments have to be made in the books of the firm. These adjustments are:-
1) Adjustment for goodwill;
2) Revaluation of assets and liabilities;
3) Adjustments of reserves, accumulated profits and losses if any etc.

1) Adjustment for Goodwill:
A Change in the profit sharing ratio of the firm means that gaining partner is going to purchase from the sacrificing partner his share of profits. The gaining partner must compensate the sacrificing partner by paying the sacrificing partner by paying him the proportionate share of goodwill which is equal to share gained by him.
2) Revaluation of assets and liabilities:
The assets and liabilities of the firm are revalued and the profit or loss resulting from the revaluation is transferred to the capital accounts of all the partners in theire old ratio.
3) Adjustments of reserves, accumulated profits and losses:
If there are any reserves or accumulated profits/losses appearing in the balance sheet of the firm these should be transferred to the capital accounts of the firm . If the partners decide to leave them undisturbed it is necessary to make an adjustment entry in the books of the firm. The gaining partner must compensate the sacrificing partner that share of profits and reserves which is proportionate to the share gained by him.