Adjustment in Existing Partner’s Capital Account in case of Change in Profit Sharing Ratio

Change in profit-sharing Ratio or reconstitution of firm results in adjustment of capital accounts of the partners. The capital of the new firm is adjusted with respect to the new profit-sharing of the partners in the firm. When there is a change in the profit-sharing ratio or reconstitution of the firm, all the accumulated profit and loss are distributed among the partners in the old profit-sharing ratio. If goodwill exists, it is written off by debiting the partner’s capital account in the old profit-sharing ratio. Assets are revalued and liabilities are reassessed because the revalued amount belongs to the partners.

The difference between the new profit-sharing ratio and the old profit-sharing ratio is calculated to know the sacrificing and gaining share of each partner. The total adjusted capital is distributed among the partners in the new profit-sharing ratio. If there is a deficit in the capital, the concerned partner brings in cash equal to the deficit amount and if there is a surplus, the concerned partner withdraws the excess amount of capital with respect to the change in the new profit-sharing ratio.

Calculation of Adjustment in the Existing Partner’s Capital Account:

Step 1: Calculate the adjusted old capitals of the existing partners. It can be calculated as follows:

Step 2: Calculate the total old capital by adding the old adjusted capital of all the partners.

Step 3: Calculate new adjusted capital by dividing the total capital by the new ratio.

Step 4: Find out excess or deficit in the capital accounts of each partner after finding the difference of old adjusted capital and new adjusted capital.

Step 5: In case of deficit, the concerned partner has to bring in the deficit amount and in case of excess, the concerned partner withdraws the excess amount. 

Format of Adjustment in the Existing Partner’s Capital Account:

Illustration: 

The Balance Sheet of the firm of Geeks Ltd. on 31st March, 2021 was as follows:

Jack and Daniel were sharing profit and loss in the ratio of 3:2. With effect from 1st April 2021, they decide to share profit and loss equally in the future, and the following terms were agreed upon:

1. Fixed Assets were appreciated by 15%.

2. Stock was depreciated by 10%.

3. Claim on Workmen Compensation Reserve was ₹7,500.

4. Goodwill of the firm to be valued at ₹20,500.

Prepare Partner’s Capital Account on the basis of new profit-sharing and revised Balance Sheet as on 1st April  2021.

Solution: 

Working Notes:

1. Statement showing Sacrifice / Gain made by each partner:

Jack sacrifice  share and Daniel gained  share.

2. Preparation of revaluation account:

3. Calculation of Adjusted Capital of the partners:

Adjusted Capital (Firm’s Capital)  = ₹44,278 + ₹26,102

= ₹70,380

Adjusted New Capital in the ratio of 1:1

Jack’s Capital = ₹35,190

Daniel’s Capital = ₹35,190

4. Calculation of Cash:

Opening balance of Cash – Claim on Workmen Compensation Reserve

= ₹18,700 – ₹7,500

= ₹11,200