Change in Profit Sharing Ratio of Partners Test - 6

All revalued contents will be shown in revaluation account as follows:

1.Increase in asset credit side

2.Decrease in asset debit side

3.Increase in liability debit side

4.Decrease in liability credit side

At the time of reconstitution of a partnership firm partners can distribute only free and accumulated reserves and profits. In the given question, only contingency reserve is a free reserve which partners can distribute in their old profit sharing ratio.

When only net effect of revaluation is recorded by doing a single entry, in such a case partners’ capital or current account will be involved for the adjustment. The net effect of revaluation will be adjusted in their gain or sacrificing ratio. Gainer partner will be debited by his gain share in revaluation profit or loss and sacrificing partner will be credited by his sacrificing share.

There is a gain of 2/24th to Sneh and Sudha. Pushpa will sacrifice 1/24th each of their share. Hence Sudha’s and Pushpa’s capital account should be credited each by 1/24th of the balance in profit and loss account, i.e. 1/24 × 24,000 = Rs. 1,000 each and Sneh’s capital account should be debited by Rs. 2,000.

Calculation of adjustment of amount of workmen compensation reserve:

Old Ratio 5:3:2

New Ratio 3:5:2

Sacrifice or Gain : VN : 5/10 – 3/10 = 2/10 Sacrifice

MN : 3/10 – 5/10 = 2/10 Gain

KN : 2/10 – 2/10 = No Sacrifice/No Gain

All unrecorded liabilities will be recorded in the revaluation account at the time reconstitution of partnership firm. Unrecorded liabilities will be recorded in the debit side of revaluation account.

Main purpose of preparing revaluation account is to assess the profit or loss. Revalutation account is prepared to record the revaluation of assets and re-assessment of liabilities. The profit or loss arising because of revaluation is transfered to old partners capital account in their old profit sharing ratio.

At the time of reconstitution of a partnership firm, it is necessary to revalue the assets and reassess the liabilities. For this purpose revaluation account is prepared to record any increase/decrease in the value of assets and liabilities. The value of some assets may increase or decrease with the passage of time. Similarly some liabilities may also show an increase/decrease in the value. The Revaluation account is credited if there is an increase in the value of assets or decrease in the value of liabilities. On the other hand it is debited if there is any decrease in the value of assets or an increase in the value of liabilities.

Loss on revaluation should be debited to the partners’ capital account or partners’ current account. In this question profit on revaluation, profit as per profit and loss appropriation account and profit as per profit and loss account is given, all these items will take place in the credit side of partners capital account or partners current account.

Adjustment for the amount of profit and loss account:

X’s capital account is to be debited with Rs.1,600 i.e. 6,000 × 8/30 = 1,600

X = 1/3 – 6/10 = 8/30 Gain

Y = 1/3 – 3/10 = 1/30 Sacrifice

Z = 1/3 – 1/10 = 7/30 Sacrifice

The actual value of the assets and liabilities may be different from their book value as shown by the balance sheet. That’s why revaluation account is prepared to record this change in assets and liabilities.

Re-assessment of liabilities means checking increase or decrease in the amount of liabilities or if a new liability is arises which is not yet recorded in the books of account. Re-assessment of liabilities is done through the revaluation account.

This is a situation where revaluation profit or loss is not directly distributed by the partners. The net effect of revaluation will be adjusted in their gain or sacrificing ratio. Gainer partner will be debited by his gain share in revaluation profit or loss and sacrificing partner will be credited by his sacrificing share.

At the time of reconstitution of partnership firm, it is necessary to prepare revaluation account or revalue the assets and re-assess the liabilities otherwise present value of the assets will be different from the previous book value of assets.

Any profit that arises out of revaluation account should be credited to the old partners’ capital/current account in their old profit sharing ratio. But if any loss arises out of revaluation account should be debited to the old partners’ capital/current account in their old profit sharing ratio.

Adjustment of General Reserve at the time of change in profit sharing ratio:

Old Ratio = 1:2:3 and New Ratio 1:1:1

X = 1/6 – 1/3 = 1/6 Gain

Y = 2/6 – 1/3 = No Sacrifice/No Gain

Z = 3/6 – 1/3 = 1/6 Sacrifice

When reconstitution of a firm takes place, it is necessary to revalue the assets and re-assess the liabilities. The process of recording change in the value of assets and liabilities is called revaluation. Profit or loss calculated through revaluation is distributed among the partners in their profit sharing ratio.

Revaluation account is prepared to record any increase/decrease in the value of assets and liabilities. The value of some assets may increase or decrease with the passage of time. Similarly some liabilities may also show an increase/decrease in the value. The Revaluation account is credited if there is an increase in the value of assets or decrease in the value of liabilities. On the other hand it is debited if there is any decrease in the value of assets or an increase in the value of liabilities.

There are some rules for the preparation of Revaluation Account:

1. Increase in assets debit

2. Decrease in assets credit

3. Increase in liabilities credit

4. Decrease in liabilities debit

There are two method of preparing partners capital accounts:

1.Fixed Capital Method

2.Fluctuating Capital Method

When nothing is mentioned in the question then it should be assumed that capitals of partners are fluctuating but if current accounts and capital accounts are given separately then it should be assumed that capitals of partners are fixed.