(1) Sacrifice Ratio / Gaining ratio:

Sacrifice or gain can be calculated by comparing old profit sharing ratio and new profit sharing ratio. If new share is in excess of the old share of a partner, the result is gain and vice-versa.

Following formula can be used for calculating Sacrifice/gain:

Sacrifice ratio = Old ratio- New ratio (gain, if the result is in negative).

Gaining Ratio = New ratio- Old ratio (sacrifice, if the result is in negative).

It is important to know that in every case the total sacrifice is equal to the total gain.

 

(2) Treatment of Goodwill:

Upon change in profit sharing ratio, the gaining partner must compensate the sacrificing partner, with respect to sacrifice/gain of the partners and the value of goodwill, by passing the following journal entry:

Gaining Partner’s Capital account           Dr. (Gain x Goodwill of the firm)

To Sacrificing Partner’s capital Account   (Sacrifice x Goodwill of the firm)

(Being the adjustment of Capital accounts for goodwill)

(Total sacrifice is equal to the Total gain.)

Existing Goodwill if any should be completely written off by passing the following journal entry:

All Partners’ Capital accounts         Dr. (in old profit sharing ratio)

To Goodwill (Goodwill of the firm existing in the balance sheet)

 

(3) Treatment of Accumulated profits/losses

(1) If partners decide to share the existing profits/losses, following journal entry is to be passed:

Accumulated Profits account          Dr. (by the name of the account)

To All partners’ Capital accounts (in their old profit sharing ratio)

(Being the accumulated profits shared by the partners in their profit sharing ratio)

(2) If the partners decide not to share these profits or they don’t want to disturb the existing profits or simply said, they want to pass an adjusting entry regarding these profits; following adjusting entry is passed similar to that in case of treatment of goodwill valued on the date of change in profit sharing ratio i.e.

Gaining Partner’s Capital account           Dr. (Gain x Accumulated Profits of the firm)

To Sacrificing Partner’s capital Account   (Sacrifice x Accumulated Profits of the firm)

(Being the adjustment of Capital accounts for Accumulated profits)

It may be noted that reverse entry is to be passed in case of Accumulated losses.

List of Common items under Accumulated Profits and Losses.

It is to be noted down, that Employees’ Provident Fund is not one of the items of Accumulated profits, but a liability, to be paid by the firm.

 

(4) Revaluation of assets/liabilities

(1) If partners decide to share the Revaluation profit or (they want to change the values of assets and liabilities or they want to show the revised values in the new balance sheet), following journal entry is to be passed:

Revaluation account          Dr. (with the amount of profit)

To All partners’ Capital accounts (in their old profit sharing ratio)

(Being the revaluation profit shared by the partners in their profit sharing ratio)

(2) If the partners decide not to share the revaluation profits or they don’t want to change the values of assets and liabilities or they want to keep the values of assets and liabilities same or simply said, they want to pass an adjusting entry regarding these revaluation profits; following adjusting entry is passed similar to that in case of treatment of goodwill valued on the date of change in profit sharing ratio i.e.

Gaining Partner’s Capital account           Dr. (Gain x Revaluation Profit of the firm)

To Sacrificing Partner’s capital Account   (Sacrifice x Revaluation Profit of the firm)

(Being the adjustment of Capital accounts for Revaluation profits)

It may be noted that reverse entry is to be passed in case of Revaluation losses.

 

(5) Capital Adjustment

On change in profit sharing ratio, partners sometimes decide to adjust their capital accounts according to their profit sharing ratio. In this case capitals of all the partners after adjustments are totaled and then according to that total capital of the firm, again the capitals of all the partners are calculated and shown as closing capitals, the balance if any on Dr. Side or Cr. side may be transferred to bank or Current account as specified in the question.

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