Reconstitution of Partnership Firm
Meaning
Reconstitution of partnership means change in the partnership agreement due to any reason.
Different Cases of Reconstitution
(1) Change in profit sharing ratio.
(5) Amalgamation of partnership.
Adjustments to be made on Reconstitution of Firm
(1) Calculation of Sacrifice/gaining ratio.
(2) Treatment of Goodwill.
(3) Treatment of Accumulated profits/losses.
(4) Revaluation of assets /liabilities.
(5) Adjustment of Capitals.
It is very important to know that basic problems encountered in all these cases are same and should be treated with some modifications for each case separately.
So, Read the following portion after reading these topics once.
Important Summary Hints
for
Easy Understanding of Reconstitution
Case 1: Change in Profit Sharing Ratio
Case 2: Admission of a partner
Case 3: Retirement/death of a partner
Issues on reconstitution
- New Profit-Sharing Ratio
- Treatment of Goodwill
- Revaluation Account
- Undistributed Profits/ Losses
- Adjustment of Capitals
- Balance Sheet of the New Firm
New Profit-Sharing Ratio:
- Change in Profit Sharing Ratio
Existing Partners
Individual partners can sacrifice/gain/remains unaffected
2. Admission of a partner
New Partner 'always gains'
Old partners can sacrifice/gain/remains unaffected
3. Retirement/death of a partner
Retiring Partner 'always sacrifices'
Remaining partners can sacrifice/gain/remains unaffected
Treatment of Goodwill
1. Writing off existing Goodwill:
All Partners' Capital A/C....Dr.
To Goodwill A/C
(whosoever has worked till date, means excluding new partner but including retiring partner).
2. Valuation of Goodwill:
Gaining Partner's Capital A/C Dr.
To Sacrificing Partner's Capital A/C
(In all these cases)
Revaluation of Assets and Liabilities
Transfer of Revaluation Profit:
Revaluation A/c ......Dr.
To Partners' Capital A/cs
(whosoever has worked till date, means excluding new partner but including retiring partner).
Reverse Entry in case of loss.
Almost all the Undistributed Profits and losses are treated in the same manner.