AGRA PUBLIC GROUP OF INSTITUTIONS

SUBJECT: ACCOUNTANCY
CLASS: XII

Reconstruction of Partnership Firm

Meaning of Reconstruction
Any change in agreement of partnership is called reconstitution of partnership firm. These changes
are brought about by certain conditions like the retirement of a partner, admission of a new partner or change in
terms of business among the existing partners like change in profit sharing etc.
“Restructuring in firms is also known as reconstitution of a partnership firm”
Reconstitution of a partnership enterprise normally takes place in any of the following ways mentioned below :

Change in the profit sharing ratio: Sometimes the partners of an enterprise may determine to change their
current gain (profit) sharing ratio.This results in a difference in the existing agreement that leads to reconstitution
of the enterprise.

Admission of a new partner: A new partner might be admitted when an enterprise requires additional capital or
organisational assistance. In accordance with the provisions of the Partnership Act 1932 and it is diversely
furnished in the deed of partnership, a new partner can be admitted when the existing partners collectively give
their consent for it.

Retirement of an existing partner: This means withdrawal by a partner from the business of the firm which
might be due to his deteriorating health conditions, old age or change in business activities. In fact, a partner can
retire any time, if the partnership is made at will.

Death of a partner: Partnership may determine reconstituted on the death of a partner, only if the remaining
partners determine to persist the business of the enterprise as usual.

Change in PSR
Old profit sharing ratio: The ratio in which the old partners were share the profits of the firm in
past is known as Old profit sharing ratio.

New profit sharing ratio: The ratio in which the partners are to share the profits in future on
reconstitution is known as New profit sharing ratio.

Gaining Ratio: It is the ratio in which the profit sharing ratio of gaining partners increases. It is
calculated by taking difference between New profit sharing ratio and old profit sharing ratio.

Sacrificing Ratio: It is the ratio in which the profit sharing ratio of sacrificing partners decreases. It
is calculated by taking difference between old profit sharing ratio and new profit sharing ratio.

Revaluation account: it is opened by the firm to record the gains and losses arising from revaluation of
assets and reassessment of liabilities at the time of reconstitution of the firm. Hence, the output is either a
profit or a loss, so it is a nominal account.