Existing partners may decide to change their profit sharing ratio for various reasons. When the profit sharing ratio is revised among existing partners, there ought to be a partial sacrifice of profit share by some partners in favour of others. The sacrifice of one or a group of partners becomes the gain of the remaining partners. When the profit sharing ratio is revised it is important to calculate the sacrificing ratio and gaining ratio. These ratios are required to adjust the value of goodwill of a firm without raising goodwill account in the books. Sacrifice / gain ratios can be applied to adjust the profit or loss on revaluation of assets and liabilities in the capital accounts of partners without actually changing the values of those assets and liabilities.
Remember the most important rule in adjusting sacrifice/gain in all situations:
Gaining Partner Dr.
To Sacrificing Partner
Method of calculating sacrificing ratio and gaining ratio
Sacrificing ratio in partnership accounting is the ratio in which existing partners sacrifice their share of profit. This happens due to a revision in profit sharing ratio or admission of a new partner. This is calculated by deducting the new ratio from the old. When there is sacrifice new ratio is always lower than the old.
Gaining ratio is the opposite of sacrificing ratio. This is the ratio gain to the existing partners of a firm when they revise the profit sharing ratio, or when the profit share of the deceased or retired partner is shared by the other partners. This ratio is calculated by deducting the old ratio from the new ratio. The new share will be higher than the old when there is a gain.
Shortcut to calculate sacrificing ratio and gaining ratio
When there is a revision of profit sharing ratio by existing partners, there will be sacrifice as well as gain within the same partnership. Therefore it is easier to stick to one formula. Take the result of new ratio minus old ratio. If the result is negative it is sacrifice; and positive it is gain.
Notice the steps once again:
- Write the new ratio in the first line
- Write the old ratio in the second line (remember to adjust the ratios to add up to the a convenient total)
- Deduct the old from new
- Negatives result indicates sacrifice; positive result indicates gain
Revaluation of Assets and Liabilities
Case (a) If value of assets increases:
Assets a/c Dr.
To revaluation a/c
Case (b) If value of assets decreases:
Revaluation a/c Dr.
To assets a/c
Case(c) If value of liabilities increases:
Revaluation a/c Dr.
To liabilities a/c
Case (d) If value of liabilities decreases:
Liabilities a/c Dr.
To revaluation a/c
Case (e) if unrecorded assets are shown in the book:
Unrecorded assets a/c Dr.
To revaluation a/c
Case (f) if unrecorded liabilities are shown in book:
Revaluation a/c Dr.
To unrecorded liabilities a/c
Case (g) when revaluation account shows profit:
Revaluation a/c Dr.
To partner’s capital a/c
Case (h) when revaluation account shows loss:
Partner’s capital a/c Dr.
To revaluation a/c
Format of revaluation account:-
Dr. Revaluation A/C Cr.
Particulars
|
Amount
|
Particulars
|
Amount
|
To Decrease in value of assets
To increase in value of liabilities
To unrecorded liabilities
To profit on revaluation transferred to partners capital accounts
(in old ratio)
|
By Increase in value of assets
By decrease in value of liabilities
By unrecorded assets
By loss on revaluation transferred to partners capital account
(in old ratio)
|
Items those never increase and decrease in revaluation account:-
Assets- Cash in hand, cash at bank, profit and loss(Dr.)
Liabilities- General reserve, profit & loss(Cr.) ,any reserve, capital and current account, bank overdraft .
Distribution of Reserves and Accumulated Profits
Case (A) when reserves and accumulated profits/losses are to be transferred to capital accounts-
(1) For transfer of reserves and accumulated profits
Reserve a/c Dr.
Profit&loss a/c Dr.
Workmen’s compensation reserve a/c Dr.
Investment fluctuation reserve a/c Dr.
To old partners capital or current a/c (in old ratio)
(2) For transfer of accumulated losses
Old partner’s capital or current a/c Dr. (in old ratio)
To profit & loss a/c
To deferred revenue expenditure a/c
Case (B) when reserves and accumulated profits / losses are not to be transferred to capitals accounts:
Gaining partner’s capital a/c Dr.
To sacrificing partner’s capital a/c
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