Accounts Class 12th (Ch.2 Changing the Profit Sharing Ratio among the existing Partner's) Part 2

Calculate the Sacrificing and Gaining Ratio :-

Sacrificing Ratio - Sacrificing Ratio is the ratio in which partners sacrified their share of profit in the favour of other partner's.

Sacrificing Partner - It refers to that partner whose share of profit has been reduced due to change in ratio is called sacrified partner.

Sacrificing Share - The reduced share of profit is called sacrificing share.

Formula :- Old share of profit - New share of profit

Gaining Ratio - It refers to the ratio in which partners gained the share of profit due to change in profit sharing profit.l

Gaining Partner - It refers to the partner whose share of has been increased after change in ratio is called gaining partner.

Gaining Share- The increased share of profit is called gaining share.

Ques.1 How to calculate the sacrifice or gaining (share) partner ?

Ans.1   a)Sacrifice or gaining share can be computes by deducting the new share of profit from the old share of profit.

b)If the result is positive that is sacrificing share.

c)If the result is negative that is gaining share.

d)Sacrifice (Gaining Share) Share - Old Ratio - New Ratio

Accounting treatment of Purchased Goodwill

(Goodwill appears in the books)

Goodwill appears in the books Rs.60,000

Solution :- Such goodwill will be written off among the old partner in their old profit sharing ratio.

JOURNAL ENTRY

Old Partner's Capital A/c              Dr.

  To Goodwill A/c

(In old Profit Sharing Ratio)

Accounting treatment of Non-Purchased Goodwill :-

Non-Purchases Goodwill is value so that gaining partner compensate to sacrificing partner.

JOURNAL ENTRY :-

Gaining Partner's Capital / Current A/c          Dr.

  To Sacrificing Partner's Capital/Current A/c

Amount of Compensation Payable :- Goodwill of the firm X Gaining Ratio

2.Accounting Treatment of Reserves , Accumulates Profit or Losses :-

On the change in profit sharing ratio if the balance of reserve , profit or losses are appear in the books that will be (transfer) distributes among the partners in their old profit sharing ratio.

A) Distribution of Profit , Reserves etc.

Reserves A/c                                            Dr.

Credit Balance of P/L A/c                        Dr.

Accumulates Profit A/c                            Dr.

Contingency Reserves A/c                       Dr.

Workmen Compensation Reserve A/c     Dr.

Investment Fluctuation Reserve A/c        Dr.

  To Partner's Capital/Current A/c

B) Distribution of Losses or Fictitious Assets.

Partner's Capital A/c                                 Dr.

  To Dr. balance of P&L A/c 

   To Fictitious A/c 

(Difference Revenue Expenditure A/c)

*In old Profit Share Ratio*

Workmen Compensation Reserve :-Workmen Compensation reserve is a reserve which has been set aside from free reserves only for meeting the unforeseen future contingencies for workmen compensation to be paid for any mishappening and accident happen to workmen at the workplace.

A : B : C

2  : 1  : 2

1  : 1  : 1

Balance of Workmen Compensation Reserve in the Liabilities side of Balance Sheet is Rs 1,00,000

1.When there is no claim regarding Workmen Compensation Reserve

>Workmen Compensation Reserve A/c  Dr.   100,000
     To A's Capital A/c                                                    40.000
     To B's Capital A/c                                                    20,000
     To C's Capital A/                                                     40,000

2.An estimate claim against Workmen Compensation Reserve Rs.50,000.

>Workmen Compensation Reserve A/c    D.r  1,00,000
     To Provision for W.C.R A/c                                     50.000
     To A's Capital A/c                                                    70,000
     To B's Capital A/c                                                    10,000
     To C's Capital A/c                                                     20,000

3.An estimates against Workmen Compensation Reserve is Rs.1,00,000

>Workmen Compensation Reserve A/c   Dr.  1,00,000
      To Provision for W.C.R A/c                                   1,00,000

4.An estimates claims Workmen Compensation Reserve is Rs.1,20,000
   
a)Workmen Compensation Reserve A/c Dr.    1,00,000
    Revaluation A/c                                  Dr.       20,000
       To Provision for W.C.R A/c                                  1,20,000

b)A's Capital A/c                   Dr.      8,000
   B's Capital A/c                    Dr.      4,000
   C'S Capital A/c                   Dr.      8,000
        To Revaluation A/c                                 20,000

5.A claim accepted Workmen Compensation Reserve Rs.50,000
 
>Workmen Compensation Reserve A/c  Dr.       1,00,000
       To Liability for W.C.R A/c                                        50,000
       To A's Capital  A//c                                                    20,000
       To B's Capital  A/c                                                     10,000
       To C's Capital  A/c                                                     20,000

Investment Fluctuation Reserve :-Investment Fluctuation Reserve is a reserve created out of the profits to meet the fall in the market value of investments. It is created to adjust the difference between the book value and market value of investment.

Balance of  Investment Fluctuation Reserve in the Liabilities side balance sheet is Rs 1,00,000

Cases are :- 

1.When the market value of Investment is Rs.5,00,000

    Investment Fluctuation Reserve A/c Dr.    1,00,000

      To A's Capital A/c                                                  40,000 

      To B's Capital A/c                                                  40,000

      To C's Capital A/c                                                  20,000

      

2.When the market value of Investment is Rs.4,50,000

    Investment Fluctuation Reserve A/c  Dr.    1,00,000

       To Interest A/c                                                       50,000

       To A's Capital A/c                                                 20,000

       To B's Capital A/c                                                  20,000

       To C's Capital A/c                                                  10,000

3.When the market value of Investment is Rs.4,00,000

    Investment Fluctuation Reserve A/c    Dr.1,00,000

      To Investment A/c                                                1,00,000

4.When the market value of Investment is Rs.3,80,000

a) Investment Fluctuation Reserve A/c Dr.     1,00,000

    Revaluation A/c                                 Dr.        20,000

       To Investment A/c                                                 1,20,000

b) A's Capital A/c                Dr.                           20,000

    B's Capital A/c                 Dr.                           20,000

    C's Capital A/c                 Dr.                           10,000

        To Revaluation A/c                                                     20,000

5.When the market of Investment id Rs.5,30,000
 a) Investment Fluctuation Reserve A/c Dr. 1,00,000
        To A's Capital A/c                                              40,000
        To B's Capital A/c                                              40,000
        To c's Capital A/c                                               20,000

b) Investment A/c                    Dr.                      30,000
       To Revaluation A/c                                                       30,000

c)Revaluation   A/c                 Dr.                      30,000
      To A's Capital A/c                                                        12,000
      To B's Capital A/c                                                        12,000
      To C's Capital A/c                                                          6,000

Adjustment of Reserves / Profit or Losses through the capital accounts only (when partners do not want distribute the Reserves / Profit or Losses).

Sometimes on the reconstitution of the partnership firm the partners decide to keep the Reserves / Profit or Losses in the revised Balance Sheet. In this case , on adjustment entry takes place through the capital account only.

1.If the net effect is Positive (Profit).

JOURNAL ENTRY :-
Gaining Partner's Capital A/c                Dr.
  To Sacrificing Partner's Capital A/c

(Amount of Compensation Payable = Net Effect "Profit X Gaining Share" )

2.If the net effect is Negative (Loss).

JOURNAL ENTRY :-
Sacrificing Partner's Capital A/c         Dr.
  To Gaining Partner's Capital A/c

(Amount of Compensation Payable = Net Effect (Loss) X Sacrificing Share )

Revaluation of Assets & Reassessment of Liabilities :-

On the change in Profit Sharing Ratio among the existing partner's (When partners want to record the revised value of Assets & Liabilities).

>Assets are revalued and liabilities are realized at the of change in Profit Sharing Ratio and the result of the this Profit or Loss transferred to partner's Capital/Current Account in their old Profit Sharing Ratio.

>For this purpose an account titled "Revaluation A/c or Profit & Loss Adjustment A/c is opened".

Revaluation A/c :-
1.It is a nominal A/c
2.It is debited when the value of assets decrease and the value of liabilities increase.
3.It is credited when the value of assets increase and the value of liabilities decrease.
4.Profit or Losses on the revaluation account transferred to Partner's Capital/Current A/c in their old profit sharing ratio.

Journal Entries related to Revaluation Account :-

1.Increase the value of Asset.

   Assets A/c                  Dr.

    To Revaluation A/c

2.Decrease the value of Asset.
   Revaluation A/c    Dr.
     To Asset  A/c

3.Increase the value of Liabilities.
   Revaluation  A/c      Dr.
     To Liabilities A/c

4.Decrease the value of Liabilities.
   Liabilities A/c           Dr.
     To Revaluation A/c

5.Profit on the Revaluation A/c.
   Revaluation A/c                              Dr.
     To Partner's Capital/Current A/c
(Included Profit Sharing Ratio)

6.Loss on the Revaluation A/c.
   Partner's Capital/Current A/c     Dr.
     To Revaluation A/c
(In Old Profit Sharing Ratio)

Combine the 1st & 3rd
Asset A/c         Dr.
Liabilities A/c  Dr.
  To Revaluation A/c

Combine 2nd & 4th
Revaluation A/c   Dr.
  To Asset A/c
  To Liability A/c

Adjustments of Profit & Loss on the Revaluation :-

If assets and reassessment of liabilities through the captial account only. 

OR

When Partners do not want to record the revised of assets and liabilities.

>If Partners decide to record the net effect of revaluation of assets and reassessment of liabilities without effecting the old value of assets and liabilities, a single adjustment entry take place through the capital accounts of gaining and sacrificing partners.

The following steps taken place :-

Step 1 To calculate the net effect of revaluation of assets and liabilities (Profit & Loss).

Increase the value of assets         =   Profit XXX

Decrease the value of liabilities  =   Profit XXX

Decrease the value of assets        =   Loss XXX

Increase the value of liabilities    =   Loss XXX

Net effect (P&L) On revaluation =     XXX       

Step 2 To calculate the sacrifice or gaining partner.

Old share - New share

Step 3 

A) If Net Effect (Profit) on Revaluation.

     Gaining Partner's Capital A/c               Dr.

           To Sacrifice Partner's Capital A/c

Amount of compensation payable = Amount of Net effect (Profit) X Gaining Share

B) If Net Effect (Loss) on Revaluation.

      Sacrifice Partner's A/c                         Dr.

           To Gaining Partner's Capital A/c

Amount of compensation payable = Amount of Net effect (Loss) X Sacrifice Share.

Adjustment of Partner's Capital Account on the Change in Profit Sharing Ratio -

Situation 1st : 

The Capital of A, B,C after all Adjustments Rs 250,000 , 320,000 , 280,000 Respectively.

The Capital of the New Firm is Fixed Rs 9,00,000 and partners want to keep their capital in their New Ratio for this actual cash be bought or paid off . 

                      A : B : C 

Old Ratio      3 : 2  : 1`

New Ratio    1 : 1  : 1

Capital of the New Firm = Rs 9,00,000

A's Required Capital = 9,00,000 X 1 / 3 = Rs 3,00,000

B's Required Capital= 9,00,000 X 1 / 3 = Rs 3,00,000

C's Required Capital= 9,00,000 X 1 / 3 = Rs 3,00,000

 1.)  Bank A/C   Dr.   70,000
         To A's Capital A/C       50,000
         To C's Capital A/C       20,000

2.)  B's Capital A/C Dr.  20,000
         To Bank A/C                    20,000

Situation 2nd :

The Capital of A, B,C after all Adjustments Rs 250,000 , 320,000 , 280,000 Respectively.
The Capital of the New Firm is Fixed Rs 9,00,000 and partners want to keep their capital in their New Ratio for this if necessary Adjustment will take place through Partner's Current A/C.
                      A : B : C
Old Ratio      3 : 2  : 1`
New Ratio    1 : 1  : 1

Capital of the New Firm = Rs 9,00,000

A's Required Capital = 9,00,000 X 1 / 3 = Rs 3,00,000
B's Required Capital= 9,00,000 X 1 / 3 = Rs 3,00,000
C's Required Capital= 9,00,000 X 1 / 3 = Rs 3,00,000

A's Current A/C Dr. 50,000
  To A's Capital A/C           50,000

 C's Current A/C Dr. 20,000
   To C's Capital A/C           20,000

B's Capital A/C Dr.  20,000
   To B's Current A/C          20,000

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