Adjustments Required when Changing Profit Sharing Ratio

When existing partners decide to change their profit sharing ratio, certain adjustments need to be made in the books of accounts of the partnership firm. The adjustments required are:

1. Goodwill

Goodwill is an intangible asset that represents the reputation and value of a business. When there is a change in the profit sharing ratio, the existing goodwill of the firm needs to be revalued. The adjustment required in goodwill can be calculated using the following formula:

New Share of Profit - Old Share of Profit x Existing Goodwill

2. Realisation Account

Realisation account is a nominal account that is prepared at the time of dissolution of a partnership firm. When there is a change in the profit sharing ratio, the realisation account needs to be prepared to adjust the capital accounts of the partners as per the new profit sharing ratio.

3. Reserves and Accumulated Profits

Reserves and accumulated profits are the profits that are retained by the partnership firm over the years. When there is a change in the profit sharing ratio, the accumulated profits and reserves need to be revalued to adjust the capital accounts of the partners. The adjustment required in reserves and accumulated profits can be calculated using the following formula:

New Share of Profit - Old Share of Profit x Existing Reserves and Accumulated Profits

4. Both Goodwill and Reserves and Accumulated Profits

When there is a change in the profit sharing ratio, both the goodwill and reserves and accumulated profits need to be adjusted in the books of accounts of the partnership firm. The adjustment required in both goodwill and reserves and accumulated profits can be calculated using the formulas mentioned above.

Conclusion

In conclusion, when existing partners decide to change their profit sharing ratio, certain adjustments need to be made in the books of accounts of the partnership firm. These adjustments include the revaluation of goodwill, preparation of realisation account, and revaluation of reserves and accumulated profits. It is important to make these adjustments to ensure that the capital accounts of the partners reflect the new profit sharing ratio.

Listen dear, when there is a change in profit sharing ratio before it all partners distribute all general reserves, goodwill, revaluation profit or loss, accumulated profits in their old ratio. Nd if u r talking abt realisation a/c then it is not distributed coz realisation a/c is made when the company is winding up. While during change in profit sharing ratio is done with the aim that gaining partner should compensate the sacrificing partner with the gain amt. So only these adjustments r made. I hope u'll understand!!!