Reconstitution of a Partnership Firm
Unit II. Change in profit-sharing ratio, admission, retirement and death of a partner.
About this unit
A partnership agreement changes whenever partners change their profit-sharing ratio, a new partner joins, or an existing partner retires or dies. Each such change ends the old agreement and creates a new one, called reconstitution. This unit shows how the firm settles the rights of partners at that moment: who sacrifices or gains a share, how goodwill is valued and adjusted, how assets and liabilities are revalued, and how reserves are distributed.
Key ideas
- Sacrificing ratio and gaining ratio.
- Goodwill: meaning, factors and methods of valuation.
- Revaluation Account for changes in assets and liabilities.
- Distribution of reserves and accumulated profits or losses in the old ratio.
- Admission, retirement and death of a partner.
- Adjustment of capitals and settlement of amounts due.
How to prepare
Practise the ratio calculations until they are automatic, since every reconstitution problem starts with them. Learn the formats of the Revaluation Account and partners' capital accounts, and the journal entries for goodwill in each case. Expect numericals on goodwill valuation and ratio calculation, and conceptual questions on who is debited or credited.
Topics in this chapter
Change in profit-sharing ratio
Sacrificing ratio and gaining ratio among existing partners.
5 questionsRevaluation of assets and reassessment of liabilities
Revaluation Account, and distribution of reserves and accumulated profits or losses.
5 questionsGoodwill: nature and valuation
Nature of goodwill, factors affecting it, and the average profit, super profit and capitalisation methods.
5 questionsAdmission of a partner
New and sacrificing ratios, goodwill, revaluation, reserves and adjustment of capitals on admission.
5 questionsRetirement of a partner
Gaining ratio, goodwill, revaluation, accumulated profits and the retiring partner’s loan account.
5 questionsDeath of a partner
Deceased partner’s capital account, executor’s account and settlement of the amount due.
5 questions