| TOPIC 1 |

RECONSTITUTION OF A PARTNERSHIP FIRM

It implies change in the existing partnership deed or agreement among the
partners in a partnership firm.
Modes of Reconstitution of a Partnership Firm

Meaning of Change in Profit Sharing Ratio among Existing Partners

It refers to the mutual agreement among the partners to change their existing
ratio of sharing profits and losses in the future.
Adjustment at the time of Change in Profit Sharing Ratio
(1) Calculation of New Profit Sharing Ratio, Gaining and Sacrificing Ratio
(2) Adjustment of Goodwill
(3) Treatment of Reserves
(4) Adjustment of Accumulated Profits and Losses
(5) Revaluation of Assets and Reassessment of Liabilities
(6) Adjustment of Capitals
| TOPIC 2 |
DETERMINATION OF SACRIFICING RATIO AND GAINING
RATIO
New Profit Sharing Ratio
The ratio in which all the partners have agreed to share the future profits and
losses is regarded as new profit sharing ratio.
New Ratio = Old Ratio – Sacrificing Ratio
OR
New Ratio = Old Ratio + Gaining Ratio
Cases for calculation of New Profit Sharing Ratio
(1) When only one partner surrenders his/her share in favour of another

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 partner
(2) When all the partners surrender their share in favour of another partner in
an agreed ratio
Sacrificing Ratio
It refers to the ratio in which the partners surrender their share in favour of
the another partner.
Sacrificing Ratio = Old Ratio – New Ratio
Caution
 Students should give attention to the words "of" and "from" while
calculating sacrificing ratio.
Example 1. On what occasions sacrificing ratio is used?
Ans.  The following are the different situations when sacrificing ratio is used:
(1)When the existing partners of a partnership firm agree to change the
profit sharing ratio among themselves.
(2)When a new partner is admitted in the partnership firm and the
amount of goodwill brought by him/her is transferred among the old
partners in sacrificing ratio of old partners.
Gaining Ratio
It is defined as a difference between the new profit share and the old profit
share of a partner. It may be on the occasion of change in existing profit
sharing ratio in the case of death or retirement of a partner.
Gaining ratio = New ratio – Old ratio
Important
 On change in profit sharing ratio , gaining partners compensate sacrificing
partners.
Important Terminologies
Gaining Partner:Partner whose share has increased.
Sacrificing Partner:Partner whose share has decreased.
Gaining Ratio: Ratio in which the share of the gaining partners increases.
Sacrificing Ratio: Ratio in which the share of sacrificing partners decreases.
Caution
 Sacrificing ratio is just opposite of gaining ratio , students mostly make
mistake in applying both the formulae.
Example 2. X, Y and Z are sharing profits and losses in the ratio of 5 : 3 :
2 . With effect from 1st April, 2019 they decide to share profits and losses
equally. Calculate each partner’s gain or sacrifice due to the change in
ratio. [NCERT]

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Ans. Old Ratio (X, Y and Z) = 5 : 3 : 2
New Ratio (X, Y and Z) = 1 : 1 : 1
Sacrificing or (Gaining Ratio) = Old Ratio – New Ratio
5 1 15 – 10
X’s share = − =
10 3 30

= 5 (Sacrifice)
30

3 1 9 – 10
Y’s share = − =
10 3 30

–1
= (Gain)
30

6 − 10 –4
Z’s share = = = (Gain)
30 30

1 4
So, Y’s Gain = , Z’s Gain = ,
30 30

..
and X’s Sacrifice=
30

4 Accountancy Class XII

 OBJECTIVE Type Questions
[ 1 mark ]
Multiple Choice Questions
1. Anubhav, Shagun and Pulkit are partners in a firm sharing
profits and losses in the ratio of 2 : 2 : 1. On 1st April,
2021, they decided to change their profit sharing ratio to
5 : 3 : 2. On that date, debit balance in Profit and Loss Account of `
30,000 appeared in the balance sheet and partners decided to pass
an adjustment entry for it. Which of the under mentioned options
reflect correct statement for the above statement?
(a)Shagun's capital account will be debited by ` 3,000 and Anubhav's
capital account credited by ` 3,000
(b)Pulkit’s capital account will be credited by ` 3,000 and Shagun's
capital account will be credited by ` 3,000
(c)Shagun's capital account will be debited by ` 30,000 and Anubhav's
capital account will be credited by ` 30,000
(d)Shagun’s capital account will be debited by ` 3,000 and
Anubhav’s and Pulkit’s capital account will be credited by
` 2,000 and ` 1,000 respectively.
[CBSE SQP Term-1 2021]
Ans. (a) Shagun's capital account will be debited by ` 3,000 and
Anubhav's capital account credited by ` 3,000
[CBSE Marking Scheme SQP Term-1 2021]
Explanation:
Sacrificing
= Old Ratio – New Ratio
Gaining Ratio

2 5 1
Anubhav = − = gain
5 10 10
2 3 1
Shagun = – = sacrifice
5 10 10
1 2
Pulkit = – = nil
5 10

Shagun’s Capital A/c Dr. 3000

To Anubhav’s Capital A/c 3,000

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2. Recording of unrecorded asset will lead to:
(a)gain to existing partners
(b)loss to existing partners
(c)neither gain nor loss to existing partners
(d)all of these
Ans. (a)gain to existing partners

Assertion-Reason Questions
For the following questions two statements are given: One labelled as
Assertion (A) and the other is labelled as Reason (R). Select the correct
answer to these questions from the codes (a), (b), (c) and (d) as given below:
(a) (A) is correct but (R) is wrong.
(b) Both (A) and (R) are correct, but (R) is not the correct explanation of (A).
(c) Both (A) and (R) are correct, and (R) is the correct explanation of (A).
(d) (A) is wrong but (R) is correct.

3. Assertion (A):It is important to compute sacrificing and gaining ratio at

the time of change in the profit sharing ratio.
Reason(R):Sacrificing partner compen-sates the gaining partner by
paying him proportionate amount of goodwill.
Ans. (a)(A) is correct but (R) is wrong.
Explanation: Gaining partner compensate to the sacrificing partner in by
paying him proportionate amount of goodwill.

CASE BASED Questions (CBQs)

[ 2 & 4 marks ]

Read the following passages and answer the question that follows:

4. A, B and C, sharing profits and losses in the ratio of 4 : 3 : 2, decided to

share future profits and losses in the ratio of 2 : 3 : 4 with effect from
1st April, 2018. An extract of their Balance Sheet as at 31st March,
2018 is:

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 Liabilities Amount Assets Amount
(`) (`)
Investments Fluctuation 18,000 Investments(At 2,00,000
Reserve cost)

(A)What will be the amount credited to partner’s capital account in

case there is no additional information is given.
(B)What will be the amount credited to partner’s capital account in
case market value of investment is ` 1,91,000.
Ans. (A) In case no additional information is given ` 18000 is distributed
among old partners in old ratio
4
A ` 18,000 × = ` 8,000
9
3
B ` 18,000 × = ` 6,000
9
2
C ` 18,000 × = ` 4,000
9

(B)In case market value of investment is ` 1,91,000, but in books it is at

` 2,00,000 loss of ` 9,000 will be adjusted from reserve and balance
amount will be distributed between partners in old ratio.
4
A = ` 9,000 × = ` 4,000
9
3
B = ` 9,000 × = ` 3,000
9
2
C = ` 9,000 × = ` 2,000
9

VERY SHORT ANSWER Type Questions (VSA)

[ 1 mark ]

5. Define Gaining and Sacrificing Ratio.

Ans. Gaining Ratio: It is the ratio in which continuing partner acquires, the
share in profit from outgoing partner or from other continuing partner in
case of change in profit sharing ratio.
Sacrificing Ratio: Ratio in which the old partners sacrifice their share in

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 favour of new partner is called sacrificing ratio.
Caution
 Students mostly confuse between both the terms. They should
understand the concepts properly.
Related Theory
 New ratio = Old ratio – Sacrificing ratio (in case of admission)

SHORT ANSWER Type-I Questions (SA-I)

[ 3 marks ]

6. A, B and C who are presently sharing profits and losses in the ratio
of 5 : 3 : 2 decide to share future profits and losses in the ratio of
2 : 3 : 5. Give the Journal entry to distribute Investment Fluctuation
Reserve of ` 20,000 at the time of change in profit sharing ratio,
when investment (market value ` 95,000) appears in the books at `
1,00,000.
Ans. Journal Entry
Date Particulars L.F. Debit (`) Credit
(`)
(i) Investment Fluctuation Reserve A/c Dr. 20,000
To Investment A/c 5,000
To A’s Capital Account 7,500
To B’s Capital Account 4,500
To C’s Capital Account 3,000
(Being amount of Investment
Fluctuation Reserve distributed after
adjustment)
Caution
 Students mostly forget to adjust book value of investment with market value
of adjustment i.e. ` 5000.
Related Theory
 Investment fluctuation reserve is always distributed between old
partners in old ratio.

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 LONG ANSWER Type Questions (LA)
[ 6 marks ]
7. X and Y are partners with ratio 4 : 1 from 1st April 2023 they decided
to change their ratio as 3 : 2. Balance Sheet as on 31st March 2023 is
given here under:

X and Y Balance Sheet

31st March 2023
Amount Amount
Liabilities Assets
` `
Capitals Cash 1,00,000
X 3,00,000 Furniture 2,00,000
Y 2,00,000 5,00,000 Machinery 1,00,000
Geenral Reserves 1,00,000 Debtors 1,50,000
Creditors 20,000 Stock 70,000
Total 6,20,000 6,20,000
Additional Information:
(i) Goodwill of the firm is valued at ` 2,00,000
(ii)Stock was undervalued by ` 10,000
(iii)Depreciate Machinery @ 10%
(iv)Debtors of ` 10,000 proved bad.
(v)Capitals of X and Y are to be adjusted in their New Ratio.
Prepare necessary Accounts and show the workings.
Ans. Working Notes:
(1)Calculation of Gaining and Sacrificing ratio:
4 3 1
X= – = sacrifice
5 5 5
1 2 1
Y= – =– Gain
5 5 5

(2)Treatment of Goodwill
Y's Capital A/c will be debited with the amount
1
=× 2,00,000 = ` 40,000
5

X's Capital A/c will be credited

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 1
= × 2,00,000 = ` 40,000
5

(3)Distribution of Reserves
Question is silent about distribution, so we shall distribute reserves in
old ratio.
1
X = ` 1,00,000 × = ` 80,000
5
1
Y = ` 1,00,000 × = ` 20,000
5

(4)Revaluation of Assets
Revaluation A/c
Amount Amount
Particulars Particulars
` `
To Machine 10,000 By Stock 10,000
To Debtors (Bad Debts) 10,000 By X's Capital 8,000
By Y's Capital 2,000
20,000 20,000
Capital A/c
X Y X Y
Particulars Particulars
` ` ` `
To Revaluation 8,000 2,000 Bal. b/d 3,00,000 2,00,000
To X's Capital 40,000 By Reserves 80,000 20,000
To Cash 58,000 By Y's Capital 40,000
Bal. c/d 3,54,000 2,36,000 By Cash 58,000
4,20,000 2,78,000 4,20,000 2,78,000
(5)Adjustment of Capitals
Adjusted Capital
X = 3,00,000 + 80,000 + 40,000 – 8,000 = 4,12,000
Y = 2,00,000 + 20,000 – 2,000 – 40,000 = 1,78,000
` 5,90,000
New Capital
3
X = ` 5,90,000 × = ` 1,18,000 × 3 = ` 3,54,000
5

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 2
Y = ` 5,90,000 × = ` 2,36,000
5

Difference
X = ` 3,54,000 – ` 4,12,000 = ` 58,000 (withdrawn)
Y = ` 2,36,000 – ` 1,78,000 = ` 58,000 (bring)

Balance Sheet after Reconstitution

Amount Amount
Liabilities Assets
` `
Capitals: Cash 1,00,000
X 9,54,000 Furniture 2,00,000
Y 2,36,000 Machinery 90,000
Creditors 20,000 Debtors 1,40,000
Stock 80,000
Total 6,10,000 6,10,000

Caution
 Students are advised to follow the instuction given here.
Requires adjustments when there is change in profit sharing ratio.
Calculation of Gaining and sacrifing ratio 1 (Given in questions)
• Treatment of Goodwill 2 (Given in questions)
• Treatment of Reserves 3 (Given in questions)
• Revaluation of Assets 4 (Given in questions)
• Adjustment of Capital 5 (Given in questions)
So, adjustment 1, 2, 3, 4, 5 (all above adjustment are given in questions).

Change in Profit Sharing Ratio 11

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