CHAPTER3

ReconstitutionofPartnership
MeaningofReconstitution:
Anychangeinagreementofpartnershipiscalledreconstitutionofpartnershipfirm.In
followingcircumstancesapartnershipfirmmaybereconstituted:
1.ChangeinProfitSharingRatio
2.Admissionofapartner
3.Retirement/Deathofapartner
Change in profit sharing ratio among the existing partners
Meaning:
Whenallthepartnersofafirmagreetochangetheirprofitsharingratio,theratiomaybe
changed.Inthiscaseoneprofit ispurchasingashareofpartnerfromanotherone.In
other words, share of one partner may increase and share of another partner may
decrease.
Accounting treatment of goodwill:
In case of change in profit sharing ratio, the gaining partner must compensate the
sacrificingpartnerbypayingtheproportionateamountofgoodwill.
Illustration1
AmitandKajalwerepartnersinafirmsharingprofitsintheratioof3:2.Witheffect
fromJanuary1,2012theyagreedtoshareprofitsequally.Forthispurposethegoodwill
ofthefirmwasvaluedat60,000.Passthenecessaryjournalentry.
Solution:
OldratioofAandB=3:2
NewratioofAandB=1:1
SacrificeorGain:
Amit=3/51/2=65/10=1/10Sacrifice
Kajal=2/51/2=45/10=1/10Gain
Journal
Date
Particulars
L.F. Debit Credit
Rs.
Rs.
2012
KajalcapitalA/c
Dr.
6,000
Jan1
ToAmit'CapitalA/c
6,000
(Adjustmentforgoodwill onchange
inprofitsharingratio)

26

Accountancy& XII

Accounting treatment of Reserves andAccumulated Profits:

Case (i) When reserves and accumulated profits/losses are to be distributed
Atthetimeofchangeinprofitsharingratio,iftherearesomereservesoraccumulated
profits/lossesexistinginthebooksofthefirm,theseshouldbedistributedtopartnersin
theiroldprofitsharingratio.
Illustration2:Vaishali,VinodandAnjaliarepartnerssharingprofitsintheratioof4:3:2.
FromApril1,2011,theydecidedtosharetheprofitsequally.Onthatdatetheirbooks
showedacreditbalanceof3,60,000intheprofitandlossaccountandabalanceof
90,000intheGeneralreserve.Recordthejournalentryfordistributionoftheseprofits
and reserves.
Solution:
Journal
Date
Particulars
L.F.
Debit
Credit
2011
Apr.1

Profit& Loss
Dr.
GeneralReserveA/c
Dr.
ToVaishali'sCapitalA/c
ToVinod'sCapitalA/c
ToAnjali'sCapitalA/c
(Profitandgeneralreservedistributed
inoldratio)

`
3,60,000
90,000

2,00,000
1,50,000
1,00,000

Illustration3:AnjumandKanchanarepartnerssharingprofitsandlossesintherationof
3:2,FromApril1,2011theydecidedtosharetheprofitsintheratioof2:1.Onthatdate,
profit and loss account showed a debit balance of ` 1,20,000. Record the Journal for
transferring this to partner's capital accounts.
Solution:
Journal
Date
Particulars
L.F. Debit Credit
`
`
2011
Anjum'scapitalA/c
Dr.
72,000
Apr.1
Kanchan'scapitalA/c
Dr.
48,000
ToProfitandLossA/c
1,20,000
(Undistributed losses transferred to partners'
capitalaccountsinoldratio)
Case (ii) When accumulated profits/losses are not be distributed at the time of
change in ratio
Partners may decidethat reserves and accumulatedprofits/losses willnot beaffected
and remains in the books with same figure. In this case, the gaining partner must
27

Accountancy& XII

compensatethesacrificingpartnerbythesharegainedbyhimi.e.
GainingPartner'sCapitalA/c
Dr.
ToSacrificingPartner'sCapitalA/c.
Illustration 4:Keshav, Meenakshiand Mohit sharingprofit and losses in theratio of
1:2:2,decidetosharefutureprofitequallywitheffectfromApril1,2011.Onthatdate
generalreserveshowedabalanceof ` 2,40,000.Partnersdonotwanttodistributethe
reserves.Youarerequiredtogivetheadjustingentry.
Solution:Keshav:Meenakshi:Mohit
Oldratio1/5:2/5:2/5
Newratio1/3:1/3:1/3
SacrificeorGain:
Keshav=1/51/3=35/15=2/15(Gain)
Meenakshi=2/51/3=65/15=1/15(Sacrifice)
Mohit=2/51/3=65/15=1/15(Sacrifice)
Journal
Date
Particulars
L.F. Debit Credit
`
`
Keshav'scapitalA/c
Dr.
32,000
ToMeenakshi'scapitalA/c
16,000
ToMohit'scapitalA/c
16,000
(AdjustmentforGeneralreserveon
changeinprofitsharingratio
Illustration5:Neha,Niharika,andNitinarepartnerssharingprofitsandlossesinthe
ratioof2:3:4.Theydecidedtochangetheirratioandtheirnewratiois4:3:2.Theyalso
decidedtopassasinglejournalentrytoadjustthefollowingwithoutaffectingtheirbook
values:
`
Profit&Lossaccount
80,000
General Reserve
40,000
Advertisement SuspenseA/c
30,000
Youarerequiredtogivethesinglejournalentrytoadjusttheabove.
Solution:
Profit&Lossaccount
80,000
Add: General Reserve
40,000
1,20,000
Less:Advertisement Suspense
30,000
Totalamounttobeadjusted
90,000
Neha
Niharika
Nitn
Oldratio
2/9
3/9
4/9
Newration
4/9
3/9
2/9
SacrificeorGain:

2011
Apr.1

28

Accountancy& XII

Neha=2/94/9=2/9(Gain)
Niharika=3/93/9=0(Nochange)
Nitin=4/92/9=2/9(Sacrifice)
JOURNAL
Date

Particulars

L.F.

Debit Credit
`
`
20,000
20,000

Neha'scapitalA/c
Dr.
ToNitin'scapitalA/c
(adjustmentforprofit&lossA/c,
General reserves and advertisment
SuspenseA/c
Accounting treatment for Revaluation ofAssets and reassessment of Liabilities
on change in Profit sharing ratio:
Atthetimeofchangeinprofitsharingratioofexistingpartners,Assetsandliabilitiesof
afirmmustberevaluedbecauseactualrealizablevalueofassetsandliabilitiesmaybe
differentfromtheirbookvalues.Changeintheassetsandliabilitiesbelongstotheperiod
priortochangeinprofitsharingratioandthereforeitmustbesharedinoldprofitsharing
ratio.
Revaluationofassetsandliabilitiesmaybetreatedintwoways:
(i) Whenrevisedvaluesaretobeshowninthebooks.
(ii) Whenrevisedvaluesarenottobeshowninthebooks
When revised values are to be shown in the books:
Inthiscaserevaluationofassetsandliabilitiesiscompletedwiththehelpof"Revaluation
Account.This account is alsoknown as Profit andLossAdjustmentAccount.All
losses duetorevaluationare shownindebit sideofthis account and allgains dueto
revaluationareshownincreditsideofthisaccount.
Note:(1)IncreaseinthevalueofanAssetanddecreaseinthevalueofaliabilityresult
inprofit.
(2)DecreaseinthevalueofanyassetandIncreaseinthevalueofliabilitygivesloss.
Illustration6:
Piyush,PujaandPraveenarepartnerssharingprofitsandlossesintheratioof3:3:2.
TherebalancesheetasonMarch31st 2011wasasfollows.
Liabilities
`
Assets
`
Sundry creditors
48,000 Cashatbank
74,000
BankLoan
72,000 Sundry debtors
88,000
Capital:
Stock
2,40,000
Piyush
4,00,000
Machinery
3,18,000
Puja
3,00,000
Building
4,00,000
Praveen
3,00,000
10,00,000
11,20,000
11,20,000
29

Accountancy& XII

PartnersdecidedthatwitheffectfromApril1,2011,theywouldshareprofitsandlosses
intheratioof4:3:2.Itwasagreedthat:
(i)Stockbevaluedat` 2,20,000.
(ii)Machineryistobedepreciatedat10%.
(iii)Aprovisionfordoubtfuldebtsistobemadeondebtorsat5%.
(iv)Buildingistobeappreciatdby20%.
(v)Aliabilityfor` 5,000includedinsundrycreditorsisnotlikelytoarise.
Partnersagreedthattherevisedvaluearetoberecordedinthebooks.Youarerequired
to prepare journal, revaluation account, partners capital account and revised balance
sheet.
Journal
Date
Particulars
L.F.
Debit
Credit
2011

RevaluationA/c
Dr.
To Stock
To Machinery
ToProvisionfordoubtfuldebtsA/c
(Revaluationofassets)
BuildingA/c
Sundry creditors
ToRevaluationA/c
(Revaluationofassetsandliabilities)
RevaluationA/c
ToPiyush'scapitalA/c
ToPooja'scapitalA/c
ToPraveen'scapitalA/c
(Profitonrevaluation)

`
56,200

20,000
31,800

80,000
5,000
85,000
28,800
10,800
10,800
7,200

RevaluationAccount
Particulars
`
Particulars
To stock
20,000 Bybuilding
To machinery
31,800 By sundry creditors
To Provisionfor doubtful debts
4,400
Toprofitdistributed:
Piyush
10,800
Pooja
10,800
Praveen
7,200
28,800
85,000

30

`
80,000
5,000

85,000

Accountancy& XII

Partners' CapitalAccount
Particulars Piyush Pooja Praveen Particulars Piyush
Pooja Praveen
Tobalance 4,10,8003,10,800 3,07,200 Bybalance 4,00,000 3,00,000 3,00,000
c/d
b/dByreval
uation
10,800 10,800
7,200
4,10,8003,10,800 3,07,200
4,10,800 3,10,800 3,07,200
Balance Sheet
asonApril1,2011
Liabilities
`
Assets
`
Sundry creditors
43,000 Cashatbank
74,000
BankLoan
72,000 Sundry debtors
88,000
Capitalaccount:
Less:provision5% 4,400 83,600
Piyush
4,10,000
Puja
3,10,800
Stock
2,20,000
Praveen
3,07,200
Machinery
2,86,200
10,28,800 Building
4,80,000
11,43,800
11,43,800
When revised values are not to be shown in the books.
Illustration7.
Inillustration6,Partnersagreedthattherevisedvalueofassetsandliabilitiesarenotto
beshowninthebooks.Youarerequiredtorecordtheeffectbypassingasinglejournal
entry.Alsopreparetherevisedvaluebalancesheet.
Gain due to revaluation
`
Building
80,000
Sundrycreditors
5,000
TotalA
85,000
Less:lossduetorevaluation
Stock
20,000
Machinery
31,800
Provisionfordoubtfuldebts
4,400
Total B
56,200
Netgainfromrevaluation
Total (AB)
28,800
OldRatio=3:3:2
NewRatio=4:3:2
SacrificeorGain:
Piyush=3/84/9=5/72(Gain)
Pooja=3/83/9=3/72(Sacrifice)
Praveen=2/829=2/72(Sacrifice)
Amounttobeadjusted:
Piyush=` 28,800x5/72=` 2,000Debit
Pooja=` 28,800x3/72=` 1,200Credit
Praveen=` 28,800x2/72=` 800Credit
31

Accountancy& XII

Journal
Date

Particulars

L.F.
Rs.

2011
Apr.1

Piyush'scapitalA/c
Dr.
ToPooja'scapitalA/c
ToPraveen'scapitalA/c
(Adjustmentforprofitonrevaluation)

Debit Credit
Rs.
2,000
1,200
800

Capital Accounts
Pooja Praveen Particulars
Piyush PoojaPraveen

ByBalanceb/d 4,00,0003,00,0003,00,000

Particulars Piyush
To Pooja's
1,200
CapitalA/c
To Praveen
ByPiyush's
CapitalA/c
800

CapitalA/c
ToBalance 3,98,000 3,01,200 3,00,800
C/d
4,00,000 3,01,200 3,00,800

Liabilities
Sundry Creditors
BankLoan
Capitalaccount:
Piyush
3,98,000
Puja
3,01,200
Praveen
3,00,800

32

800

4,00,0003,01,2003,00,800

Balance Sheet
asonApril1,2011
`
Assets
48,000 Cashatbank
72,000 Sundry debtors
Stock
Machinery
Building
10,00,000
11,20,000

1,200

`
74,000
88,000
2,40,000
3,18,000
4,00,000

11,20,000

Accountancy& XII