CHAPTER - 3

Change in Profit
Sharing Ratio Among
The Existing Partners
Meaning of Reconstitution of a
Partnership Firm
Reconstitution of partnership means a change in existing
agreement i.e. mutual terms and conditions among partners.
As a result, an old agreement among the partners comes to
an end and a new agreement comes into existence.
 Circumstances When We Need to
Reconstitution of a Partnership Firm
1. Change in profit sharing ratio among the existing partner.
2. Admission of a new partner.
3. Retirement of an existing partner.
4. Death of a partner.
5. The Combining of two or more partnership firms.
Profit Sharing Ratio
New Profit Sharing Ratio:
The ratio at which the partners decide to share profits/losses in future.

Sacrificing Ratio:
The ratio in which the partners have agreed to sacrifice their share of profit in
favour of other partners.
Sacrificing ratio = Old Ratio – New Ratio

Gaining Ratio:
The ratio in which the partners have agreed to gain their share of profit from
other partners.
Gaining ratio = New Ratio – Old Ratio
Subsequent Adjustments:
At the time of Reconstitution of the Firm, Few Adjustments are
also made in the firm.
1. Revaluation of assets and liabilities;
2. Adjustments of reserves accumulated profits, and losses if
any etc.
3. Adjustment for goodwill
Adjustment for Goodwill
At the time of reconstitution of a firm, The gaining partner
pays the sacrificing partner the proportionate share of goodwill
which is equal to share gained by him
Revaluation of Assets and Liabilities
At the time of reconstitution of the firm, re-valuation of the assets and
liabilities is done. Revaluation of assets and re-assessment of liabilities is
done because:
To bring the assets and liabilities at their correct values in the books
Unrecorded assets and liabilities of the firm are brought into the books
of the firm
To ascertain the actual position of the firm.
Profit and loss arriving on account of such revaluation up to the date of
reconstitution may be adjusted in the partner’s capital accounts in their
sacrificing Ratio.
 Adjustments of Reserves,
Accumulated Profits, and Losses
Any reserves or accumulated profits/losses appearing on the
balance sheet should be transferred to the partner’s capital
accounts. If the partners decide to leave them undisturbed it is
necessary to make an adjustment entry in the books of the firm.
In that case, the share gained by the gaining partner, he must
compensate the sacrificing partner that share of profits and
reserves which is proportionate to him.
THANK YOU SIR
Name : Abhyansh Singhal
Class : 12th - C
Roll No. : 01