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Why do existing partners change their profit sharing ratio:
- a)Due active participation in management by a partner
- b)Due to change in capital contribution
- c)Due to Tax Policy of Government
- d)Both Due to change in capital contribution and Due active participation in management by a partner
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
Why do existing partners change their profit sharing ratio:a)Due activ...
Reasons for Change in Profit Sharing Ratio
There are various reasons why existing partners may change their profit sharing ratio. Some of the reasons are discussed below:
1. Due to Active Participation in Management by a Partner
When a partner is actively involved in the management of the business, it is likely that they will demand a larger share of the profits. This is because they are contributing more than just their capital to the business. They are also contributing their time, skills, and expertise, which are just as important as capital. Therefore, if a partner is actively involved in the management of the business, it may be necessary to adjust their profit sharing ratio accordingly.
2. Due to Change in Capital Contribution
Another reason why partners may change their profit sharing ratio is due to a change in capital contribution. If one partner contributes more capital than the other, it is only fair that they receive a larger share of the profits. Similarly, if one partner reduces their capital contribution, it may be necessary to adjust their profit sharing ratio accordingly.
3. Due to Tax Policy of Government
Sometimes, the government may introduce new tax policies that affect the profit sharing ratio of partners. For example, if the government introduces a new tax on profits, it may be necessary to adjust the profit sharing ratio to ensure that each partner is paying their fair share of the tax.
Conclusion
In conclusion, partners may change their profit sharing ratio for various reasons. However, the most common reasons are due to a change in capital contribution and active participation in management by a partner. It is important for partners to discuss and agree on the profit sharing ratio beforehand to avoid any misunderstandings or disputes in the future.
There are various reasons why existing partners may change their profit sharing ratio. Some of the reasons are discussed below:
1. Due to Active Participation in Management by a Partner
When a partner is actively involved in the management of the business, it is likely that they will demand a larger share of the profits. This is because they are contributing more than just their capital to the business. They are also contributing their time, skills, and expertise, which are just as important as capital. Therefore, if a partner is actively involved in the management of the business, it may be necessary to adjust their profit sharing ratio accordingly.
2. Due to Change in Capital Contribution
Another reason why partners may change their profit sharing ratio is due to a change in capital contribution. If one partner contributes more capital than the other, it is only fair that they receive a larger share of the profits. Similarly, if one partner reduces their capital contribution, it may be necessary to adjust their profit sharing ratio accordingly.
3. Due to Tax Policy of Government
Sometimes, the government may introduce new tax policies that affect the profit sharing ratio of partners. For example, if the government introduces a new tax on profits, it may be necessary to adjust the profit sharing ratio to ensure that each partner is paying their fair share of the tax.
Conclusion
In conclusion, partners may change their profit sharing ratio for various reasons. However, the most common reasons are due to a change in capital contribution and active participation in management by a partner. It is important for partners to discuss and agree on the profit sharing ratio beforehand to avoid any misunderstandings or disputes in the future.
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Why do existing partners change their profit sharing ratio:a)Due activ...
Sometimes old partners may change their existing profit sharing ratio without admitting a new partner or without retirement or death of a partner. The main reason of change in existing ratio is to make ratio favorable as per the contribution of partners’ capitals and to compensate a partner who is actively participating in the management of firm.
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