A short notes of change in PSR and Admission of a Partner.

1. COMMERCE TUITION CLASSES CFA R.K. Agrawal(M.Com, B.Ed.)
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Change in PSR and Admission of a partner
According to Section 4 ofthe Indian partnership Act, 1932 “Partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any of themacting for all.”
Any change in existing agreement of partnership is reconstitution of the firm. As a result, existing agreement comes to an end
and new agreement comes into existence. But the firm continues.
Note- Reconstitution of a firm always leads to change in profit-sharing ratio among the partners.
Adjustment for Change in Profit Sharing Ratio:
1. Determination ofSacrificing Ratio and Gaining Ratio
S/R or G/R = Old Share – New Share
2. Accounting Treatment of Goodwill (in the case ofChange in PSR, Retirement &Death):
Amount of Compensation Payable = Value of Firm’s Goodwill × Share of Profit Gained/Gaining Ratio
(a) When Goodwill adjusted through Partners’ Capital Account:
Entry passed to adjust goodwill is:
Gaining partners’ Capital/Current A/cs……………………..Dr. (In Gaining Ratio)
To Sacrificing Partners’ Capital/Current A/cs (In Sacrificing Ratio)
(Being the adjustment made for goodwill on change in PSR)
(b) If partners want to open Goodwill Account:
(i) Goodwill A/c ……………………………………..Dr.
To Partner’s Capital/Current A/c (In old PSR)
(ii) Partners’ Capital A/c……………………………..Dr. (In New PSR)
To Goodwill A/c
3. Accounting Treatment ofGoodwill (Admission): also shown later in tabular form
Amount of Compensation Payable = Value of Firm’s Goodwill × Share of Profit Gained/Gaining Ratio
(a) When newpartner brought goodwill along with capital in Cash or Kind:
(i) Bank A/c/ Assets A/c…………………………Dr.
To New Partner Capital A/c
To Premium for Goodwill A/c
(ii) Premium for Goodwill A/c…………………….Dr.
To Sacrificing Partner’s Capital/Current A/c
(b) When newpartner didn’t brought goodwill:
(i) Bank A/c/ Assets A/c…………………………Dr.
To New Partner Capital A/c
(ii) New Partner Capital/Current A/c…………………….Dr.
To Sacrificing Partner’s Capital/Current A/c
(c) When Goodwill paid privately
No accounting entry should be passed.
Note: If S/P withdrew the part of goodwill
S/P Capital/Current A/c………………Dr.
To Bank A/c
Treatment ofExisting Goodwill ( in the case of,Change in PSR, Admission, Retirement & Death)
All Partners’ Capital/Current A/cs ……………………..Dr. (In Old Ratio)
To Goodwill A/c (With Existing Book Value of Goodwill)

2. COMMERCE TUITION CLASSES CFA R.K. Agrawal(M.Com, B.Ed.)
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4. Accounting Treatment ofReserves and Accumulated Profits or Losses
Accumulated Profits & Loss: Distribute in old partners in old Ratio
1. Accumulated Profits A/c Dr. (Reserves, P&L A/c (Cr.) ,IFF, WCR etc.)
To Old Partners’ Capital/Current A/c (in Old Ratio)
2. Old Partners’ Capital/Current A/c Dr. (in Old Ratio)
To Accumulated Loss A/c [Advertisement Suspense A/c, P&L A/c (Dr.)]
Note: WCR:- is distributed the excess amount over the actual liabilities
IFF:- excess amount is distributed over the actual fluctuation in Investment Value.
Alternative, When partners may decide the existing balances of Profit & Loss or Reserves should continue in new
firm Balance sheet, an adjustment entry is made directly in the Partners’ Capital A/c.
Accounting Treatment:
Gaining/Continuing Partners’ Capital/Current A/c Dr.
To Sacrificing/Outgoing Partners’ Capital/Current A/c
(Being the credit balances amount compensated.)
Sacrificing/Outgoing Partners’ Capital/Current A/c Dr.
To Gaining/Continuing Partners’ Capital/Current A/c
(Being the debit balances amount compensated.)

3. COMMERCE TUITION CLASSES CFA R.K. Agrawal(M.Com, B.Ed.)
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5. Accounting treatment ofRevaluation ofAssets & Reassessment ofLiabilities:
Whenever firm is reconstituting, assets are revalued and liabilities are reassessed because the retiring/deceased or new
admit partner is not an advantage or disadvantage because of the change in the values.
For this purpose, a revaluation account (or profit and loss adjustment account) is prepared.
This account is debited with all reduction in the value of assets and increase in liabilities and credited with increase in
assets and decrease in liabilities. The difference in two sides of the account will show profit and loss and transferred into
the capital account of all old partners in the old PSR and assets and liabilities are shown at their new values in new
Balance sheet of the firm. Entries to be passed:
1. Revaluation A/c ……………….Dr.
To Assets A/c [(B.V. - R.V.) reduction in the value of the assets shown individually]
To Liabilities A/c [(R.V. – B.V.) increased in the value of the Liabilities shown individually]
2. Assets A/c……………………..Dr. [(R.V. – B.V.) increased in the value of the assets shown individually]
Liabilities A/c…………………Dr.[(B.V. - R.V.) reduction in the value of the Liabilities shown individually]
To Revaluation A/c
3. Revaluation A/c……………..Dr. [Profit on Revaluation]
To Old Partners’ Capital/Current A/c [In Old Ratio]
4. Old Partners’ A/c …………..Dr. [In Old Ratio]
To Revaluation A/c [Loss on Revaluation]
Alternatively, the partners may agree that revalued figures will not be shown in the new firm Balance sheet Assets
and Liabilities would appear in the New firm Balance Sheet at their old values. Memorandum Revaluation A/c is
opened for recorded the Increase/Decreases in the amount of Assets & Liabilities.
Memorandum Revaluation A/c discussed in the chapter Change in PSR among the existing Partner.
Accounting Treatment:
Gaining/Continuing Partners’ Capital/Current A/c Dr.
To Sacrificing/Outgoing Partners’ Capital/Current A/c

4. COMMERCE TUITION CLASSES CFA R.K. Agrawal(M.Com, B.Ed.)
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(Being the profit on revaluation amount compensated.)
Sacrificing/Outgoing Partners’ Capital/Current A/c Dr.
To Gaining/Continuing Partners’ Capital/Current A/c
(Being the loss on revaluation amount compensated.)
6. Accounting Treatment ofGoodwill (in the case of Admission)
Goodwill Brought in Cash/Kind Goodwill, not brought in cash/kind Paid
Privately
Cash A/c……Dr.
To New Partner’s Capital A/c
To Premiumfor Goodwill A/c
(Being Goodwill & Capital brought)
Cash A/c……Dr.
To New Partner’s Capital A/c
(Being Capital brought) No
Treatment
Premiumfor Goodwill A/c…Dr.
To Sacrificing Partner’s Capital/Current A/c(S/R)
(Being Goodwill distributed in Sacrificing ratio)
New Partner’s Capital/Current A/c …Dr.
To Sacrificing Partner’sCapital/Current A/c(S/R)
(Being compensation distributed in Sacrificing
ratio)
When amount of Goodwill premium withdrew by
Sacrificing Partner’sCapital/Current A/c(S/R)..Dr.
To Bank A/c
Sacrificing partner’s