It is required for Profit Sharing Ratio based on capitals.
Sometimes the Profit sharing ratio is based on partners’ capitals which keep on changing with every withdrawal or addition of capital. In this case the ratio of Effective Capitals is to be used as Profit sharing ratio.
The effective capitals are the capitals of the partners with respect to the number of months these have been used in the business during an accounting year, and can to be calculated as under:
|Partner’s Capital||Number of months it remained in business||Product|
|X x x x x x||xx||X x x x x x x x|
Capital Ratio= Ratio of effective capitals
Note: These tables must be prepared separately for each partner.