Change in profit sharing ratio among existing partners

When partners change how they share future profits, the one who gives up a share must be paid for it by the one who gains. Everything earned so far is settled in the old ratio.

Reconstitution of a firm

Any change in the agreement between partners ends the old agreement and begins a new one. The firm continues, but it is said to be reconstituted. This happens when the profit sharing ratio changes, a partner is admitted, or a partner retires or dies. This page deals with the first case, which contains every idea used in the others.

Sacrificing ratio and gaining ratio

Sacrifice (or gain) of a partner = Old share − New share. A positive answer is a sacrifice; a negative answer is a gain.

Example. Arun, Bimal and Chand share profits 3 : 2 : 1. From 1 April 2026 they will share equally.

Partner	Old share	New share	Old − New	Result
Arun	3/6	2/6	1/6	Sacrifices 1/6
Bimal	2/6	2/6	0	No change
Chand	1/6	2/6	−1/6	Gains 1/6

Step 1: Goodwill

The gaining partner compensates the sacrificing partner for the share of future profit he takes over. The firm's goodwill is valued at ₹1,20,000. Chand gains 1/6, worth ₹20,000, from Arun.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 1	Chand's Capital A/c Dr.	20,000
	To Arun's Capital A/c		20,000
	(Adjustment for goodwill on change in profit sharing ratio)

No Goodwill Account is opened. If goodwill already appears in the balance sheet, it is first written off to all partners in the old ratio.

Step 2: Reserves, accumulated profits and losses

Reserves and undistributed profits were earned under the old agreement, so they belong to the partners in the old ratio. They are transferred to the capital accounts before the new ratio begins. The firm has a General Reserve of ₹60,000.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 1	General Reserve A/c Dr.	60,000
	To Arun's Capital A/c		30,000
	To Bimal's Capital A/c		20,000
	To Chand's Capital A/c		10,000
	(General reserve distributed in the old ratio 3 : 2 : 1)

An accumulated loss (debit balance of Profit and Loss Account) or deferred advertising expenditure is treated the other way: partners' capital accounts are debited in the old ratio.

If the partners do not want to disturb the reserve

A single adjusting entry gives the same effect. Share of each partner in ₹60,000: old ratio 30,000, 20,000, 10,000; new ratio 20,000 each. Arun loses ₹10,000 and Chand gains ₹10,000 by the change, so:

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 1	Chand's Capital A/c Dr.	10,000
	To Arun's Capital A/c		10,000
	(Adjustment for general reserve not distributed)

Step 3: Revaluation of assets and reassessment of liabilities

Assets may be worth more or less than their book values. Any such gain or loss also arose under the old agreement. A Revaluation Account is prepared:

Debit: decrease in the value of assets, increase in liabilities, unrecorded liabilities.
Credit: increase in the value of assets, decrease in liabilities, unrecorded assets.
The balance (profit or loss) is transferred to the partners' capital accounts in the old ratio.

On 1 April 2026 the building is revalued upward by ₹30,000 and stock is found overvalued by ₹6,000.

Dr. Revaluation A/c Cr.
Particulars	₹	Particulars	₹
To Stock A/c	6,000	By Building A/c	30,000
To Arun's Capital A/c (3/6)	12,000
To Bimal's Capital A/c (2/6)	8,000
To Chand's Capital A/c (1/6)	4,000
	30,000		30,000

The capital accounts after all adjustments

Opening capitals: Arun ₹3,00,000, Bimal ₹2,00,000, Chand ₹1,00,000.

Particulars	Arun	Bimal	Chand
Opening balance	3,00,000	2,00,000	1,00,000
Goodwill adjustment	20,000	0	(20,000)
General reserve	30,000	20,000	10,000
Revaluation profit	12,000	8,000	4,000
Closing balance	3,62,000	2,28,000	94,000

Total capital rises from ₹6,00,000 to ₹6,84,000: by the reserve of ₹60,000 and the revaluation profit of ₹24,000. The goodwill entry moves money between partners and does not change the total.

Summary of the order of work

Find each partner's sacrifice or gain.
Adjust goodwill: gaining partners' capital debited, sacrificing partners' capital credited.
Distribute reserves and accumulated profits or losses in the old ratio.
Prepare the Revaluation Account and transfer its balance in the old ratio.
Prepare the capital accounts and the new balance sheet.

The same five steps are used on admission and retirement, with one addition in each.

Questions students ask

How is the sacrificing ratio calculated?

For each partner, subtract the new share from the old share. Partners with a positive result have sacrificed, and the ratio of those results is the sacrificing ratio.

In which ratio is the general reserve distributed on a change in ratio?

In the old profit sharing ratio, because the reserve was built from profits earned under the old agreement.

Is a Goodwill Account opened on change in profit sharing ratio?

No. Goodwill is adjusted directly between the capital accounts of the gaining and sacrificing partners.