Page 4 - L N (change in psr)
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I. Whenever there is increase in the profit share of a partner, it means that
such partner purchases share of profit from other partner or partners by
acquiring his or their share.
II. The partner whose share of profit increases should compensate the
partner or partners whose share(s) is decreased i.e. gaining partners
should compensate sacrificing partner(s).
III. This compensation payable by the gaining partner for his gain to the
sacrificing partner or partners is known as Goodwill or Premium for
Goodwill.
IV. Amount of Compensation Payable is calculated as follows:
Entry to be passed to adjust Goodwill, when there is a change in the profit
sharing ratio and no Goodwill Account is Opened:
Gaining Partners’ Capital A/cs …Dr. *In gaining ratio+
To Sacrificing Partners’ Capital A/cs *In sacrificing ratio+
(Being the adjustment made for goodwill on change in profit-sharing ratio)
Accounting treatment for goodwill that is existing in the books of the firm:
All Partners’ Capital/Current A/c’s …Dr. *in old ratio+
To Goodwill A/c [with exiting book value of goodwill]
Treatment of Reserves, Accumulated Profits or Losses that exist in the books of
account at the time of change in profit sharing ratio:
If any reserves and accumulated profits or losses exist in the books of firm at the
time of change in profit sharing ratio, they are to be transferred to the Partners’
Capital Accounts or their Current Accounts in their old profit sharing ratio as such
existing reserves and profits are earned before the reconstitution of the firm.
Workmen Compensation Reserve:
