In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
An existing partner whose future profit share falls.
An existing partner whose future profit share rises.
A nominal account used to record increases/decreases in asset values and reassessment of liabilities at reconstitution.
An accumulated profit distributed among old partners in their old ratio unless the agreement specifies otherwise.
Core notes
Calculate sacrifice and gain
For every partner calculate old share minus new share. A positive result is sacrifice; a negative result is gain. Sacrificing partners compensate gaining partners for the benefit of goodwill. Check that total sacrifices equal total gains. If ratios are expressed in unlike denominators, convert to a common denominator before subtraction.
At reconstitution, assets and liabilities are reassessed. Increase in asset or decrease in liability is credited to Revaluation Account; decrease in asset or increase in liability is debited. The resulting profit or loss belongs to the old partners in their old ratio because the change takes effect after that date.
Core notes
Goodwill and accumulated balances
When goodwill is adjusted through capital/current accounts rather than raised as an asset, debit gaining partners and credit sacrificing partners in the sacrificing ratio. Existing reserves and accumulated profits are distributed among old partners in their old ratio; accumulated losses are debited to them in that ratio. Do not use the new ratio for past reserves.
If partners choose to raise goodwill, follow the problem instruction and applicable accounting treatment. When goodwill is written off after being raised, debit partners’ capital accounts in the new ratio and credit Goodwill. State which approach is being used.
Core notes
Capital alignment and balance sheet
After recording revaluation, reserves and goodwill, compare capital balances with any required new capital ratio. A partner bringing additional cash is debited to Bank and credited to Capital; excess capital withdrawn is the reverse. Prepare the new balance sheet only after all adjustments and verify that total assets equal liabilities plus partners’ capitals.
Goodwill treatment depends on the agreement and the method stated in the question. If goodwill already appears in the books and is to be written off, debit partners’ capital accounts in the old ratio and credit Goodwill. For a revaluation, record each increase or decrease in assets and liabilities in the Revaluation Account, then distribute its balance in the old ratio. Do not confuse a change in the sharing ratio with admission or retirement: the same partners continue, but future profit shares change.
Worked example
Step-by-step illustration
A and B share 3:2 and change to 1:1. A sacrifices 3/5 − 1/2 = 1/10; B gains 1/2 − 2/5 = 1/10. If goodwill is ₹40,000, B compensates A by ₹4,000.
| Journal entry | Dr (₹) | Cr (₹) |
|---|---|---|
| B’s Capital/Current A/c Dr. To A’s Capital/Current A/c (Goodwill adjusted in sacrificing ratio) | 4,000 | 4,000 |
Board preparation
Original practice questions
- A and B share 5:3 and change to 3:2. Find the sacrificing/gaining ratio.
- Explain why revaluation profit is shared in the old ratio.
- Pass the journal entry to adjust goodwill without raising it.
Use old share − new share separately for every partner. Keep past reserves and revaluation results in the old ratio; use the new ratio only for future profits and capital alignment.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Accounting for Partnership Firms is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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