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Change in Profit-Sharing Ratio — Video Notes
Change in Profit-Sharing Ratio
Notes based on the transcript content retrieved from the linked video; the available transcript may be partial.
Core idea
When partners change their profit-sharing ratio, adjust goodwill, reserves, accumulated profits or losses, and asset/liability values so that items from before the change are fairly attributed to the old partners. Unless a specific instruction says otherwise, old-period items are generally shared in the old ratio.
Goodwill
Newly valued goodwill is adjusted between gaining and sacrificing partners: Gaining Partners’ Capital A/c Dr. → Sacrificing Partners’ Capital A/c.
Existing purchased goodwill shown in the books is written off among old partners in the old ratio: Old Partners’ Capital A/c Dr. → Goodwill A/c.
Reserves and accumulated balances
Usual treatment: distribute reserves and accumulated profits/losses among the old partners in their old ratio. Example: Reserve A/c Dr. → Old Partners’ Capital A/cs.
If partners leave the reserve undistributed, adjust the gaining and sacrificing partners’ capitals: Gaining Partners’ Capital A/c Dr. → Sacrificing Partners’ Capital A/c.
A credit balance in Profit & Loss represents accumulated profit; a debit balance represents accumulated loss.
Special reserves
Workmen Compensation Reserve
No claim information: distribute the reserve in the old ratio.
Claim is less than the reserve: set aside the claim amount as a provision and distribute the remaining reserve among old partners.
Claim equals the reserve: transfer the full reserve to the provision.
Claim exceeds the reserve: apply the reserve first; treat the excess as a revaluation loss shared by old partners in the old ratio.
Investment Fluctuation Reserve
Compare the investment’s market value with its book value.
No relevant change: distribute the reserve in the old ratio.
Investment loss is smaller than the reserve: use the reserve for the loss and distribute any surplus reserve.
Investment loss exceeds the reserve: use the reserve first and record the excess loss through Revaluation A/c.
Investment value rises: distribute the reserve, record the investment gain, and share revaluation profit in the old ratio.
Revaluation of assets and liabilities
Revaluation accounts for value changes before the new ratio takes effect:
Asset increase → gain; asset decrease → loss.
Liability increase → loss; liability decrease → gain.
Unrecorded assets and liabilities are treated as increases in assets or liabilities, respectively.
Share revaluation profit or loss among the old partners in their old ratio.
If revised values are not to appear in the books
Calculate the net revaluation effect, then adjust the gaining and sacrificing partners’ capital accounts instead of changing the asset and liability figures.
Quick workflow
Identify the old and new profit-sharing ratios and determine who gains and who sacrifices.
Adjust goodwill and any existing goodwill balance.
Deal with reserves and accumulated profits or losses.
Assess special reserves against related claims or investment changes.
Revalue assets and liabilities, then allocate the result in the old ratio—or use a capital adjustment if revised values are not to be recorded.
Prepare the revised balance sheet as required.