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Reconstitution of Partnership 1-21
Reconstitution of Partnership 1-21
Partnership agreement defines the relationship among the partners and whenever there
is a change in relationship, it results in reconstitution of the firm.
1. Sacrifice ratio: refer to the ratio in which the partners surrender their share of profit
in favor of other partners. The part of share which is surrendered is know as sacrifice
ratio. It is calculated as follows :
1. Gaining Ratio: as a result of change in the profit sharing ratio, any one or more than one
partner receive a share of profit from the other partner/partners. The share of profit
received is known as gaining ratio.
A’s share = 3 – 2 15 – 12 = 3
= (sacrifice)
6 5 30 30
B’s share = 2 – 2 10 – 12 = -2
= (Gain)
6 5 30 30
C’s share = 1 – 1 = 5–6 = -1
(Gain)
6 5 30 30
Q.2 A, B and C are partners in a firm sharing profit and loss in the Ratio of 3 : 3 : 2. they decided to
share profit and loss equal ratio from 1st Jan., 2017 onwards. Determine each partner’s gain and
sacrifice ratio.
3 – 1 = 9–8 = 1 (sacrifice)
A’s share =
8 3 24 24
3 – 1 = 9–8 = 1 (sacrifice)
B’s share =
8 3 24 24
2 6–8 -2
C’s share = – 1 = = (Gain)
8 3 24 24
Q.3 A, B and C are equal partners in a firm. They decided to share profit and loss in the ratio of
3 : 3 : 2 from 1st Jan., 2017 onwards. Determine each partner’s gain and sacrifice ratio.
1 – 2 = 8–6 = 2 (Sacrifice)
C’s share =
3 8 24 24
Accounting Treatment of Goodwill
At the time of change in profit sharing ratio gaining partner should compensate the sacrificing
partners by payment of goodwill to him in the gaining ratio.
Solution
W.N. Sacrifice/(Gaining) Ratio = Old Ratio – New Ratio
1 – 3 = 8–9 = -1
A’s share = (Gain)
3 8 24 24
1 – 3 = 8–9 -1
B’s share = = (Gain)
3 8 24 24
1 – 2 = 8–6 = 2
C’s share = (Sacrifice)
3 8 24 24
Since C has sacrificed 2/24th share so A and B compensate to ‘C’ 1/24 and 1/24
Solution :
W.N. 1 calculation of goodwill
Goodwill = 70,000 + 85,000 + 45,000 + 35,000 – 10,000 X2 = 90,000
5
W.N. 2 Sacrifice/(Gaining) Ratio = Old Ratio – New Ratio
5 4 5–4 1
X’s share =
10 – 10 = 10 = 10 (Sacrifice)
Y’s share = 3 4 3– 4 -1
– = = (Gain)
10 10 10 10
Z’s share = 2 2 2– 2 0
– = = 10 (No Sacrifice/gain)
10 10 10
Since X has sacrificed 1/10th share, he will we compensated with Rs. 9,000 (i.e. Rs. 90,000 x 1/10) for
goodwill By Y.
Journal Entry
Solution :
W.N. 2 Sacrifice/(Gaining) Ratio = Old Ratio – New Ratio
2 2 2–2 0
R’s share =
10 – 10 = 10 = 10 (No Sacrifice/gain)
Since P has sacrificed 1/10th share, he will we compensated with Rs. 4,000 (i.e. Rs. 40,000 x 1/10) for
goodwill By Q.
Journal entry
1. (a) When undistributed reserves and accumulated profit & loss accounts are closed by
transferred to old partners capital/current account in their old ratio.
General reserve A/c Dr
profit and loss (Cr) a/c Dr
Workman compensation reserve A/c Dr
Investment fluctuation fund A/c Dr
To old partners capital/Current A/c
4 1 4–3 1
A’s Share = – = = (Sacrifice)
9 3 9 9
3 1 3–3 0 (No Sacrifice/ gain)
B’s Share = – = =
9 3 9 9
2 1 2–3 -1 (Gain)
C’s Share = – =
9 3 9 9
A sacrifice and C gain so C compensate to A
Journal entry
Journal entry
Date Particular L.F. Amount (Dr) Amount (Cr)
1. A’s Capital A/c (2,50,000 x 1/10) Dr 25,000
To B’s Capital a/c 25,000
(Being adjustment of undistributed profit and
losses due to change in profit sharing ratio)
Q.9. A B and C were partners sharing profit and loss account in the ration of 1 :3 : .2. They decided
that with from 1st January, 2017, they will share profits in the ratio of 4 : 6 : 5. for this purpose the
goodwill of the firm is valued at the total of preceding three year’s profits. The profits were: 2012-
Rs. 40,000; 2013- Rs. 10,000 (loss); 2014- Rs. 80,000 (loss); 2015- Rs. 1,20,000; 2016- Rs. 1,40,000.
Reserve and profit appeared in the balance sheet at Rs. 40,000 and Rs. 30,000 respectively. Partners
neither want to show goodwill; reserves and profits in the books. Pass journal entry.