Question -
Answer -
There is change in profit sharing only when there is addition of a new partner, retirement or death of partner or due to mutually agreed decision among the partners. Some of the factors that need to be taken into account while changing the profit sharing ratio are: goodwill, accumulated profits and reserves, liabilities and adjustment of capitals and profit or loss on the revaluation of the assets, etc.
General reserve is essentially the accumulated profits and profit or loss that is obtained on the revaluation of assets and liabilities, adjustments in capital etc.
If one or more partners decide that it is the right time for changing profit sharing ratio, then the gaining partner shall gain and the other will lose, therefore the gainer should compensate the latter. This results in debiting gaining partner capital account and crediting the sacrificing partners’ capital account.
Gaining Partner’s Capital A/c Dr.
To Sacrificing Partner’s Capital A/c
(Adjustment entry passed)
Example:
Ram, Shyam, and Mohan are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows ₹ 90,000 as general reserve, profit due to revaluation of plant and machinery ₹ 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.
| Particulars | Ram | Shyam | Mohan |
| Share of profit as per 3:2:1 | 45,000 | 30,000 | 15,000 |
| Profit on revaluation of plant and machinery | 15,000 | 10,000 | 5,000 |
| | | | |
| | 60,000 | 40,000 | 20,000 |
| Share of profit as per 1:1:1 | 50,000 | 50,000 | 5,000 |
| | | | |
| Difference (Gain or Loss) | 25,000 | – | 25,000 |
| | (Loss) | | (Gain) |
| | | | |
Here Mohan gains while Ram loses, so Ram needs to be compensated by Mohan with an amount of ₹ 25,000. The following adjustment entry is passed.
Adjustment entry:
| | | | |
| Mohan’s Capital A/c | Dr. | 25,000 | |
| To Ram’s Capital A/c | | | 25,000 |
| ( Adjustment entry passed) | | | |
| | | | | |
| | | | | |