Change in Profit sharing ratios among the existing partners

 

·         Any change in existing agreement of partnership is reconstitution of the firm. As a result, existing agreement comes to an end and new agreement comes into existence. But, the firm continues.

·         A firm is reconstituted in the event of-

(i)     Change in the profit-sharing ratio among the existing partners.

(ii)     Admission of a new partner or partners.

(iii)    Retirement of a partner.

(iv)    Death of a partner.

(v)     Amalgamation of two or more partnership firms.

·         Accounting of Goodwill-

A.     When Goodwill is adjusted through Partners` Capital Accounts

B.     When Goodwill is raised and written off

Note- Unless stated otherwise, partners` capitals should be assumed to be fluctuating.

C.     When Existing Goodwill is written off

·         Accounting of Reserves, Accumulated Profits and Losses-

(i)  For transfer of Reserves and Accumulated Profits:

(ii)  For transfer of Accumulated Losses:

(iii) When claim for compensation does not exist:

(iv) When claim for compensation is equal to amount of workmen compensation reserve:

(v)  When claim for compensation is less than the amount of workmen compensation reserve:

(vi)  When claim for compensation is more than the amount of workmen compensation reserve:

(vii)  When market value of investments is equal to book value:

(viii) Fall in value of investments is equal to Investment Fluctuation Reserve:

(ix)  Fall in value of investments is less than Investment Fluctuation Reserve:

(x)   Fall in value of investments is more than Investment Fluctuation Reserve:

(xi)  When market value of Investments is higher than Book Value:

·         Adjustment of Reserves, Accumulated Profits and Losses through Partners` Capital Accounts, When these are to be retained in the books.

·         Calculate Net Effect of Reserves, Accumulated Profits and Losses.

·         In case of positive net effect:

·         In case of negative net effect:

·         Specimen of Revaluation Account:

·         Adjustment of Capitals-

      Sometimes, reconstitution of partnership firm may also require that capital of partners be reconstituted in their profit sharing ratio so adjustment in capitals is also required. Following steps are followed:

(i) Prepare capital accounts of partners` by adjusting their old capital accounts.

(ii) Calculate total capital of new firm. (if not given)

(iii) Allocate firm’s capital in new profit sharing ratio.

(iv) Find surplus/deficit in each partner’s capital accounts.

(v)  Adjust surplus/deficiency in capital in cash or by opening partners` current account if they have fixed capital.