Loading....
Coupon Accepted Successfully!

 

Treatment of Goodwill During Change in Profit Sharing Ratio Among Partners

If the partners of a firm decides to change their profit sharing ratio, then goodwill adjustment entry need to be made through partner’s capital account.

 

When there is a change in profit sharing ratio, the following entries are made towards treatment adjustment of goodwill through partner’s capital accounts:

  • Case 1- When goodwill already exists in the Balance sheet on the date of change in profit sharing ratio.
     
    Write off the existing book value of goodwill (if any) appearing in the books of the firm by debiting all partners’ capital accounts in their old profit sharing ratio and by crediting the Goodwill account.

Journal Entry

Date

Particulars

L.F.

Debit (₹)

Credit (₹)

 

All Partners’ Capital A/c [in old ratio]       Dr.

 

 

 

To Goodwill A/c [with book value of goodwill]

(Being the existing goodwill written off in old ratio)

  • Case 2- When Goodwill is not appearing in the Balance Sheet on the date of change in profit sharing Ratio and goodwill adjustment entry has to be made through partner’s capital accounts

Journal Entry

Date

Particulars

L.F.

Debit (₹)

Credit (₹)

 

Gaining partners’ capital A/c          Dr.

     

To Sacrificing partners’ capital A/c

(Being the adjustment made for goodwill on change in profit sharing ratio)


Illustration 7

 

X, Y and Z are in a partnership, sharing profits and losses in the ratio of 4:3:3. They decided to change the profit sharing ratio to 7:7:6. Goodwill of the firm is valued at ₹ 50,000. Calculate the sacrifice/gain by the partners and pass the necessary journal entry.
 

Solution:

 

  • Case 1- Goodwill is already appearing in the Balance sheet & written off on change in profit sharing ratio.

  • Case 2 – Goodwill is not appearing in the Balance Sheet and adjustment has to be made through partner’s capital accounts.

Partner

New Share

[A]

Old Share

[B]

Difference

[A - B]

X

7/20

4/10

-1/20

Y

7/20

3/10

1/20

Z

6/20

3/10

0


Thus, Y gained 1/20th share while X sacrificed 1/20th share [ ₹ 50,000 x 1/20 = ₹ 2,500] For Z, there was no loss and no gaining ratio.

 





Test Your Skills Now!
Take a Quiz now
Reviewer Name