CBSE Class 12 Accountancy – Chapter 2: Change in Profit-Sharing Ratio Among Existing Partners

NCERT/CBSE-aligned study resource

1. Why the Ratio Changes

Existing partners may agree to change their profit-sharing ratio. A partner gaining a larger share compensates the partner sacrificing a share.

2. Sacrificing and Gaining Ratio

Sacrificing ratio = Old ratio − New ratio. A positive difference represents sacrifice. Gaining ratio = New ratio − Old ratio. A positive difference represents gain.

Illustration: A and B share 3:2 and change to 1:1. A sacrifices 3/5−1/2=1/10, while B gains 1/2−2/5=1/10.

3. Goodwill Adjustment

When the ratio changes, goodwill is adjusted so that the partner sacrificing is compensated by the partner gaining. The exact journal treatment depends on whether goodwill is raised, written off or adjusted through capital accounts.

4. Revaluation of Assets and Liabilities

Before the new ratio becomes effective, assets and liabilities may be revalued. The resulting profit or loss is distributed among old partners in the old ratio unless the agreement specifies otherwise.

5. Reserves and Accumulated Profits/Losses

Existing reserves and accumulated items are generally distributed among old partners in the old ratio before the change, because they arose before the new arrangement.

6. Memorandum Revaluation Account

A memorandum revaluation approach may be used when partners want to adjust capitals for revaluation effects without changing the book values of assets and liabilities. It has two parts: the first records revaluation in old ratio; the second reverses it in the new ratio.

7. Worked Ratio Example

If P, Q and R share 5:3:2 and agree to share 2:2:1, compare each partner’s old and new fractions to identify who sacrifices and who gains. Always convert ratios into fractions before subtracting.

Exam Focus

• Do not confuse sacrificing ratio with gaining ratio.
• Distribute old reserves before the new ratio takes effect.
• Read whether goodwill is raised, retained or written off.

Chapter-Specific MCQs

1. Sacrificing ratio is calculated as: (A) Old−New (B) New−Old (C) Old+New (D) New/Old. Answer: A.
2. Revaluation profit before a ratio change is normally shared in: (A) old ratio (B) new ratio (C) capital ratio (D) gaining ratio. Answer: A.
3. The partner who receives a larger share under the new ratio is the: (A) sacrificing partner (B) gaining partner (C) creditor (D) debtor. Answer: B.

Competency Questions

1. Calculate sacrificing/gaining ratios from old and new ratios.
2. Explain why accumulated reserves belong to the old partners before the change.
3. Determine the goodwill adjustment when one partner gains and another sacrifices.