CBSE Class 12-commerce Answered
- Meaning of Change in Profit Sharing Ratio:
i. It means reconstitution of the firm whereby the profit-sharing ratio among all the partners changes.
ii. It can be due to change in capital contribution or increased participation in management by one or more partners.
iii. It can also be on account of one or more partner(s) acquiring share of profit in the business from another partner(s). Therefore, the aggregate amount of gain of one (or more) partner(s) is equal to the aggregate amount loss/sacrifice borne by other partner(s).
iv. Therefore, if the share of one (or more) partner(s) increases then share of profit of one (or more) partner(s) decreases.
v. It leads to dissolution of partnership but not the dissolution of the firm. This is because the existing partnership agreement ends and the new agreement comes into effect.
- Adjustment for Change in Profit Sharing Ratio: Issues that need to be considered at the time of change in Profit Sharing Ratio:
i. Determining Sacrificing and Gaining ratio,
ii. Treatment for Goodwill,
iii. Accounting treatment for Reserves and Accumulated Profit or losses,
iv. Revaluation of Assets and Reassessment of Liabilities, and
v. Adjusting the capital accounts of the partners for the same.