The document discusses the treatment of goodwill when there is a change in profit sharing ratios among partners in a partnership firm. When the profit sharing ratio changes from 5:3:2 to 1:1:1 for partners Aman, Naman, and Raman respectively, an adjustment to goodwill is required. First, the existing goodwill of Rs. 50,000 is written off in the old profit sharing ratio. Then, the gain or sacrifice of each partner due to the change in ratio is calculated and goodwill is adjusted accordingly through journal entries. The capital balances of the partners in the reconstituted firm are then presented.

1. Treatment of Goodwill
on
Change in Profit Sharing Ratio
Accountancy : Class XII : Accounting for Partnership Firms
Geeta Handa

2. Geeta Handa
PGT Accountancy
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accountancy.
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accountancy papers of CBSE
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practical exam of accountancy.
geet7handa@gmail.com Geeta Handa

3. Classification of Goodwill :-
Purchased goodwill
(Appears in Balance Sheet)
Type : 1
Type : 2
Self Generated Goodwill
(Valued Goodwill )
Geeta Handa

4. Example Aman, Naman and Raman are partners sharing profits and losses in
the ratio 5 : 3 : 2 Their Balance Sheet as at 31st March 2020 stood as :
Partners decided with effect from 1st April ,2020, they will share
profits and losses equally. Goodwill of the firm was valued at Rs.1,20,000.
Pass necessary Journal Entries for the treatment of Goodwill and Prepare
Balance Sheet on Change in Profit Sharing Ratio among partners.
Liabilities Rs. Assets Rs.
Capital A/cs : Fixed Assets 3,90,000
Aman 2,10,000 Goodwill 50,000
Naman 1,50,000 Stock 60,000
Raman 1,20,000 4,80,000 Bank 40,000
Sundry Creditors 60,000
5,40,000 5,40,000
Geeta Handa

5. Entry for writing of Goodwill appeared in Books/ Balance Sheet
Old Partners’ Capital /Current* A/cs ….Dr. (in Old Ratio)
To Goodwill A/c
(Being the existing goodwill written off in old ratio)
* Note : Current A/c in case of Fixed Capitals
Geeta Handa

6. Partners’ Shares of Goodwill to be Written off :
Partners Aman Naman Raman
Old Ratio
(5 : 3 : 2)
5/10 3/10 2/10
Proportionate
Amount 50,000 X
𝟓
𝟏𝟎
50,000 X
𝟑
𝟏𝟎
50,000 X
𝟐
𝟏𝟎
= Rs.25,000 = Rs.15,000 = Rs.10,000
Geeta Handa

7. Journal Entry
Date Particulars L.F Dr. ( Rs.). Cr. (Rs. )
Aman’s Capital A/c Dr.
Naman’s Capital A/c Dr.
Raman’s Capital A/c Dr.
To Goodwill A/c
( Being the existing goodwill written
off in old Profit Sharing Ratio)
25,000
15,000
10,000
50,000
Geeta Handa

8. Partners’ Capital in Reconstituted firm
Aman’s 2,10,000 ─ 25,000
Naman’s 1,50,000 ─ 15,000
Raman’s 1,20,000 ─ 10,000
Total Capital of New/Reconstituted Firm

9. Adjustment Entry for Goodwill Valued on Change In Ratio :
Gaining Partners’ Capital /Current* A/c ….Dr.
To Sacrificing Partners’ Capital /Current A/c
(Being Goodwill adjusted on change in ratio)
* Note : Current A/c in case of Fixed Capitals
Geeta Handa

10. Calculation of Sacrifice / Gain of each Partner:
Partners Aman Naman Raman
Old Share ( 5 : 3 : 2 ) 𝟓
𝟏𝟎
𝟑
𝟏𝟎
𝟐
𝟏𝟎
New Share ( 1 : 1 : 1 ) 𝟏
𝟑
𝟏
𝟑
𝟏
𝟑
Sacrifice/Gain
Old Share ─ New Share
𝟓
𝟏𝟎
─
𝟏
𝟑
𝟑
𝟏𝟎
─
𝟏
𝟑
𝟐
𝟏𝟎
─
𝟏
𝟑
(𝟓 𝑿 𝟑)−(𝟏 𝑿 𝟏𝟎)
𝟑𝟎
(𝟑 𝐱 𝟑) −(𝟏 𝐱 𝟏𝟎)
𝟑𝟎
(𝟐 𝐱 𝟑) −(𝟏 𝐱 𝟏𝟎)
𝟑𝟎
𝟏𝟓−𝟏𝟎
𝟑𝟎
𝟗 −𝟏𝟎
𝟑𝟎
𝟔 −𝟏𝟎
𝟑𝟎
= 5/30 Sacrifice = ─ 1/30 Gain = ─ 4/30 Gain
Geeta Handa

11. Proportionate Amount to be Adjusted:
Partners Aman Naman Raman
Sacrifice/Gain = 5/30
Sacrifice
= ─ 1/30
Gain
= ─ 4/30
Gain
Proportionate
Amount 1,20,000 X
𝟓
𝟑𝟎
1,20,000 X
𝟏
𝟑𝟎
1,20,000 X
𝟒
𝟑𝟎
= Rs.20,000
Cr.
= Rs.4,000
Dr.
= Rs.16,000
Dr.
Geeta Handa

12. Adjustment Entry
Date Particulars L.F Dr. ( Rs.). Cr. (Rs. )
Naman’s Capital A/c Dr.
Raman’s Capital A/c Dr.
To Aman’s Capital A/c
( Being adjustment made for goodwill
on change in Profit Sharing Ratio)
4,000
16,000
20,000
Geeta Handa

13. Partners’ Capital in Reconstituted firm
Aman’s 2,10,000 ─ 25,000 + 20,000 = 2,05,000
Naman’s 1,50,000 ─ 15,000 ─ 4,000 = 1,31,000
Raman’s 1,20,000 ─ 10,000 ─ 16,000 = 94,000
Total Capital of New/Reconstituted Firm = 4,30,000

14. Geeta Handa
Liabilities Rs. Assets Rs.
Capital A/cs : Fixed Assets 3,90,000
Aman 2,05,000 Stock 60,000
Naman 1,31,000 Bank 40,000
Raman 94,000 4,30,000
Sundry Creditors 60,000
4,90,000 4,90,000
Balance Sheet of Reconstituted Firm
as at 1st April 2020

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