Change in Profit sharing ratio of Partners Test - 14

Calculation of gain or sacrifice:

Formula : Old Share – New Share

X = 4/9 – 3/5 = 7/45 Gain

Y = 3/9 – 1/5 = 6/45 Sacrifice

Z = 2/9 - 1/5 = 1/45 Sacrifice

When there is no decrease in the value of investment, in such a case partners may distribute the investment fluctuation reserve in their old profit sharing ratio.

A sacrificing partner is one who has given or surrendered his share in favour of a new partner. That’s why a sacrificing partner is compensated by a new partner in the form of premium for goodwill.

General reserve is a free reserve created out of the profits. It can be distributed by the partners at the end (if not used). But it cannot be sold because it is a part of profit kept aside for contingencies. Old partners will distribute it in their old ratio (if not utilised during the year).

Due to change in the profit sharing ratio among the partners, the share of one or more partner may increase and consequently share of one or more partner may decrease. therefore, gaining partner should compensate to sacrificing partner by paying goodwill to him. amount of goodwill of the firm will be paid to the sacrificing partner, which will be called as compensation, to the extent of share in profit sacrificed by him.

Calculation of gain or sacrifice:

Formula : Old Share – New Share

P = 1/2 – 4/7 = 1/14 Gain

Q = 1/2 – 3/7 = 1/14 Sacrifice

At the time of reconstitution of a partnership firm all accumulated profits and reserves are written off by the old partners in their old profit sharing ratio. Partners will write off preliminary expenses and advertisement suspense. Patents are not part of reserves and profits.

Gaining Ratio is calculated at the time of retirement or death of partner. It is the excess of new ratio over old ratio of old partners except retired or deceased partner. Formula : Gaining Ratio = New Ratio - Old

1.X will be credited because his share has been reduced from 5/10 to 1/3, X's sacrifice = 5/10-1/3 = 15/30-10/30=5/30 (Sacrificed)

2.Y will be debited because his share has been increased from 3/10 to 1/3, Y's gain = 3/10-1/3=9/30-10/30= -1/30 (Gained)

3.Z will be debited because his share also increased from 2/10 to 1/3, Z's gain = 2/10-1/3=6/30-10/30 = -4/30 (Gained)
Now, Y and Z debited and X will be credited.

There is an increase in the value of building Rs.25,000 (1,25,000 – 1,00,000). This change should be recorded in the credit side of revaluation account at the time of preparation of revaluation account.