Change in Profit Sharing Ratio

This lecture is the part of partnership accounting. It is useful for 10+2 Commerce and  B.Com. - Part 1 Classes but other can also take benefit from this.

Meaning of Change in Profit Sharing Ratio 

Changing in Profit sharing ratio means to change the ratio from old ratio to new ratio. Now, we think, why did partner take this decision? Very simple answer. They normally take this decision when they see that division among the partner is not good. For example, you are 4 brothers. You are living in a big house. Now, you have decided to divide this. If one of your brother got 70% proportion and other three is just getting 30% proportion. It will be real Justice. Actually, 90% is 90/100 or 9/10 and 30% is 30/100 or 3/10. So, their ratio is 7 : 1 : 1 : 1. So, it is not good. Every brother should have equal right. They have to get 25%. So, three brother went to court and court has given decision to change the ratio from 7 : 1 : 1 : 1 to 1 : 1 : 1 : 1.

Above example is just for your learning. Like this, when a partner sees that he bring more capital. He does more work but he gets less proportion of profit. He can demand share of profit in total profit. At that time, other partner may agree to change the ratio for giving him more proportion.

How to Change in Profit Sharing Ratio 

Changing in profit sharing ratio is done on the basis of justice rule. When we change the ratio from old to new, it will give more benefit to some partner, it may give more loss to other partner. So, all the partners who will suffer loss of profit due to changing in the profit sharing ratio. So, gaining partners will give money to loss suffering partners if their capital is already equal or on past agreement basis. This money can be given in the form of goodwill. Goodwill is intangible asset but for getting other partner's share, it can be given.

Let me explain with an example 

A and B are two partner. They divide the profit in the ratio of 5 : 3, it means 62.5 : 37.5  or 62.5% and 37.5%. Now, they decided to divide in 3 : 1. It means new ratio will be 75 : 25 or 75% for A and 25% for B. It means, A is getting 75% - 62.5% = 12.5% benefit after changing in the ratio and B is suffering 12.5% loss after changing in the ratio. So, it is the duty of A that he should pay the money in the form of goodwill to b.

Suppose, total goodwill is Rs. 20,000 and its 12.5% is Rs. 2500 which is paid by A to B.

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Accounting Education: Change in Profit Sharing Ratio
Change in Profit Sharing Ratio
Accounting Education
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