1. Change in Profit-Sharing Ratio — Why It Happens
Partners may change their profit-sharing ratio due to: change in relative contribution of capital or labour; mutual agreement to reward a partner more; preparation for admission or retirement; changed business conditions.
Effect of Change
When PSR changes from old to new — some partners' shares increase (gaining), others decrease (sacrificing). This means the gaining partners are effectively acquiring part of the future profit stream from the sacrificing partners. The sacrificing partners must be compensated — through goodwill adjustment.
2. Sacrificing Ratio
Sacrificing Ratio = Old Ratio − New Ratio
Calculated separately for each partner. A positive result = sacrifice; zero = no change; negative = gain (use gaining ratio formula instead).
Worked Example 1 — Two Partners
A and B share profits in ratio 3:2. They decide to share equally (1:1). Find Sacrificing Ratio.
| Partner | Old Ratio | New Ratio | Difference (Old−New) | Result |
|---|---|---|---|---|
| A | 3/5 | 1/2 | 3/5 − 1/2 = 6/10 − 5/10 = 1/10 | A sacrifices 1/10 |
| B | 2/5 | 1/2 | 2/5 − 1/2 = 4/10 − 5/10 = −1/10 | B gains 1/10 |
Sacrificing Ratio = A : B = 1/10 : 0 → A alone sacrifices. B gains (see gaining ratio).
3. Gaining Ratio
Gaining Ratio = New Ratio − Old Ratio
A positive result = gain. The gaining ratio is used to determine who pays the compensation for goodwill.
From Example 1:
Gaining Ratio — B gains 1/10. Only B gains, so gaining ratio is B alone.
Journal Entry for Goodwill Adjustment (if goodwill = ₹50,000):
Gaining partner (B) pays sacrificing partner (A):
Dr B's Capital A/c ₹5,000 | Cr A's Capital A/c ₹5,000
(B gained 1/10 of goodwill = 50,000 × 1/10 = ₹5,000)
Worked Example 2 — Three Partners
A, B, C share profits 5:3:2. New ratio: 2:3:5. Find SR and GR.
| Partner | Old | New | Old−New | Status |
|---|---|---|---|---|
| A | 5/10 | 2/10 | 3/10 | Sacrifices 3/10 |
| B | 3/10 | 3/10 | 0 | No change |
| C | 2/10 | 5/10 | −3/10 | Gains 3/10 |
SR = A : B : C = 3 : 0 : 0 (only A sacrifices)
GR = A : B : C = 0 : 0 : 3 (only C gains)
Goodwill adjustment: C pays A; B makes no payment.
4. Goodwill Treatment on Change in PSR
When PSR changes, goodwill of the firm must be adjusted. Two approaches:
Approach 1 — Raise and Write Off Goodwill
- Raise goodwill at agreed value by crediting Capital/Current A/cs in Old Ratio:
Dr Goodwill A/c | Cr Partners' Capital/Current A/cs (in old ratio) - Write off goodwill by debiting Capital/Current A/cs in New Ratio:
Dr Partners' Capital/Current A/cs (in new ratio) | Cr Goodwill A/c
Approach 2 — Adjustment via Current Accounts (Net Effect)
Calculate net adjustment: (Goodwill × Old Ratio) − (Goodwill × New Ratio) for each partner.
- Positive net = partner receives (Cr to Capital/Current A/c)
- Negative net = partner pays (Dr to Capital/Current A/c)
Numerical: Goodwill = ₹60,000; A:B = 3:2 → 1:1
| Partner | Credit (Old ratio) | Debit (New ratio) | Net Effect |
|---|---|---|---|
| A | 60,000 × 3/5 = 36,000 | 60,000 × 1/2 = 30,000 | +6,000 (receives) |
| B | 60,000 × 2/5 = 24,000 | 60,000 × 1/2 = 30,000 | −6,000 (pays) |
Journal: Dr B's Capital/Current A/c ₹6,000 | Cr A's Capital/Current A/c ₹6,000
