Change in profit-sharing ratio

The essentials

Existing partners may decide to change their profit-sharing ratio without anyone joining or leaving. Some partners then give up part of their share (they sacrifice) and others get more (they gain). The gaining partners must compensate the sacrificing partners for their share of goodwill, usually through a journal entry between their capital accounts.

Key points

• Sacrifice = Old share − New share (positive value).
• Gain = New share − Old share (positive value).
• Total sacrifice always equals total gain.
• Goodwill adjustment: Gaining partner's Capital A/c Dr; To Sacrificing partner's Capital A/c, with the goodwill × share gained or sacrificed.
• Reserves and accumulated profits are distributed in the old ratio, and assets and liabilities are revalued, so that the change does not hurt any partner.

Exam tips

Convert ratios into fractions with the same denominator before subtracting. A partner whose share does not change neither sacrifices nor gains.

Common mistakes

• Subtracting in the wrong direction and treating a gain as a sacrifice.
• Distributing reserves in the new ratio instead of the old ratio.