Change In Profit Sharing Ratio

→ Meaning of Reconstructions:  It means the change in the relationship among the partners.

→When Reconstruction Occurs:

1)Changes in Profit Sharing Ratio   

2)Admission of a New Partner    

3)Retirement and Death of a Partner    

4)Amalgamation of two or more Partnership Firms

Common Problems on Reconstruction:

1)Calculation of Ratio      

2)Treatment of Goodwill

3)Treatment of Reserves and Accumulated Profits or Losses

4)Revaluation of Assets and Liabilities

5)Adjustments of Capital

→Calculation of Sacrificing or Gaining Ratio

1.Sacrificing Ratio: The Ratio in which one  or More partner sacrifices their share in       favour of other . 

   Sacrificing Ratio= Old Share  -  New share

2.Gaining Ratio: The Ratio in which one or more partner gains the share of others.

            Gaining Ratio= New share – Old Share

→Treatment of Goodwill :

1)When Goodwill is  appears : It Should be written Off.

            Old Partners cap.a/c Dr.

                                                To Goodwill a/c ( In Old ratio )

2)When Present Value of goodwill is given :

            Gaining Partner cap.a/c Dr.

                                    To  Sacrificing PartnerCao.a/c Cr.( In their respective share of gain/sacrifice)

→Treatment  of Reserves/Undistributed Profits or losses

                                                                        

     Balanced Sheet 

Case 1. When they want to distribute Profits in their Account.

1.           When Reserves /  Profits are not be shown in the Books
2. ·        When Nothing is Mentioned about Reserves.

·           Entry for profits -    General Reserves/ Profits a/c Dr.

To Partners Capital a/c (In old Ratio)

  Entry For losses:  Partner’s Cap.a/c Dr.

                                                To Losses/Profit &Loss a/c (In old Ratio)

Case 2. When they don’t to distribute Reserve /profits/Losses

·      

           When they Want to keep reserves as undistributed .

·        When reserve are to be shown in New Balance sheet.

Entry For Profits :  Gaining Partner’s a/c Dr.

                                                To Sacrificing Partner’s a/c( In Gain/Sacrifice)

→ Revaluation of Assets and Liabilities :

Case:1.When they want to record the revised values/altered/New values .In this case profit on revaluation a/c is calculated and distributed between old Partners.

                                              Revaluation A/c

1. ·        Unrecorded Assets: Accrued Income,Prepaid Expenses,Unexperied Expenses.
2. ·        Unrecorded Liability: O/S Expenses,Prov. For legal Charge,Advance Income.
3. ·        By: complete amount of adjustment is shown in Revaluation.

Case 2: When altered values are not recorded ./ Old values will continue in the Books.

   In this case profit on revaluation is calculated without preparing Revaluation a/c.

Entry for profit: Gaining Partner’s cap.a/c Dr.

                                               To Sacrificing Ratio a/c Cr.( In Gain/Sac.)

Entry for Losses: Sacrificing Partner’s cap.a/c Dr.

                                                To Gaining Partner cap.a/c Cr.{In Gain/sac.}

→Treatment for Reserve /Profit &Loss/undistributed profits

Case 1: When they want to distribute /transfer to capital a/c

Entry: General Reserve a/c Dr.                                      Entry: In Losses {Reverse Entry Passed }

                        To Partner’cap a/c {In old ratio}

Case 2: When they do not want to distribute /transfer /Reserve /P/L / Undistributed profits or losses:

Entry: Gainer part. cap.a/c Dr.                                                           For losses Reverse entry

            To Sacrificing Part.cap a/c {In gain/sacrificing Ratio}