Page 2 - L N (change in psr)

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.

Meaning and the Computation of Sacrificing and Gaining Ratio

The prime purpose of computing the sacrificing and gaining ratio is to determine
the amount of compensation (goodwill) that the gaining partner shall pay to the

sacrificing partner. Following points help us in understanding their meaning:

Sacrificing Ratio:

Meaning: It is that ratio in which one or more partners forego their share of
profits in favour of one or more partners of the firm.

In simple terms, it the ratio of sacrifice made by one or more partners.
Computation: Sacrificed Share = Old Share – New Share