How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

— Kishore V, SME and ACW at Edumarz

A change in the profit-sharing ratio happens only in the event of a partner’s admission, retirement, or death, or in the event of a general agreement among the partners to modify the profit-sharing ratio. 

There are a lot of factors to consider when changing the profit sharing ratio, including goodwill, reserves, cumulative profits, profit or loss on revaluation of assets and liabilities, and capital adjustments, among others.

In terms of the general reserve problem, it mainly refers to the accumulated earnings (if any) and profit (or loss) on revaluation of assets and liabilities, which should be dispersed in the partners’ capital account according to their previous profit sharing ratio. 

When current partners opt to adjust the profit sharing ratio, some partners benefit at the expense of others. In other words, one spouse benefits while the other makes a sacrifice equivalent to the benefit.

 In that situation, the former must make up for the latter. As a result, the capital accounts of the gaining partner are debited to the amount of their gain, while the capital accounts of the sacrificial partner are credited to the extent of their sacrifice. The following item in the Journal is accepted.