CHANGES IN

PARTNERSHIP
By:
Pn. Suryani Abdul Raman
Faculty of Accountancy
UiTM Kampus Tapah
FAR160

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 LEARNING OBJECTIVES

On completion of this topic, students should be

able to:

1. Explain the scenario behind the changes in partnership

business.
2. Prepare the appropriate accounting records of a
partnership during the changes

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 PHASES IN PARTNERSHIP
FORMATION CHANGES DISSOLUTION
The accounts involve: The accounts involve:
• SOPL  SOPL
• Appropriation  Appropriation Statement
Statement
Learn on
• Partner’s Current and  Partner’s Current and theoretical
Capital Statement Capital Statement background only
• SOFP  SOFP
 Revaluation account
 Goodwill account (3
methods)

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 What is Changes in Partnership?
This is the stage where the ownership of the original partnership has
changed due to the following:

 When new partners admitted into

the partnership

-  When any of the old partner leaves the

Original partnership due to retirement/death
partnership

OR
 When there is changes to the existing
profit sharing ratio agreement

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 What is Changes in Partnership?
• Legally, when the ownership of
partnership has changed, the
original partnership is dissolved.
• Thus, a new agreement will be Changes
created to form a new partnership
to carry on the previous business. +
-
• But from an accounting point of
view only several significant
changes are to be made on the Original
partnership books, including partnership
providing of revaluation of its net
assets and goodwill.
1) Revaluation a/c
2) Goodwill a/c

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 Period of Changes

2) Changes during the

accounting period

 Take place in between the reporting

1) Changes at the end/beginning
of accounting period
it take place either on final day of the
reporting period or the first day of the
following period.
period.
 Therefore, the profit appropriation
statement will divided into “Pre” and
“Post” column to divide the profit before
the change and after the change
respectively.
 The “Pre” period is to cover period before
the changes took place, while “Post”
period covers the period of changes.

 The accumulate amount from pre to post

will then be the total amount for the
respected reporting period.

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 Period of Changes (cont.)
1) CHANGES AT THE BEGINNING OR END OF ACCOUNTING
PERIOD
1 JAN
31 DEC 20X1
20X1

 New partner admit  New partner admit

 Old partner retired
On 1 Jan 20x1 OR  Old partner retired
On 31 Dec 20x1

2) CHANGES DURING THE ACCOUNTING

PERIOD
1 JAN
1 August 20X1 31 DEC 20X1
20X1

PRE POST

 New partner admit

 Old partner retired
in between 1 Jan and
31 Dec 20x1

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 Revaluation Account
• When changes happen in partnership, the assets of the business are to be
revalued as to identify the current value of those assets.
• The process and journal entries of recording the valuation are as follows:

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 Revaluation Account (cont.)
• Illustration of the treatment of revaluation:

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 Revaluationaccount
Revaluation Account(cont.)
(cont.)
• Illustration of the treatment for revaluation

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 Goodwill Account
Goodwill account
• During changes in partnership, partners could also get a share on the intangible
asset known as goodwill. Goodwill is the amount by which the fair value of the
business net assets exceeds its net assets’ book value.
• Basically, the goodwill account is not to be maintained in the books of partnership
(write-off). Under this method, a goodwill account will be opened but only on
temporary basis. This account will then be closed, thus will not be shown in the
statement of financial position of the partnership.
• Journal entries to record the goodwill:

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 Goodwillaccount
Goodwill Account (cont.)
(cont.)
• Illustration for the treatment of goodwill:

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 Goodwillaccount
Goodwill Account (cont.)
(cont.)
• Illustration for the treatment of goodwill:

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 Goodwill
Methods account
of calculating Goodwill
• In some cases, the goodwill amount is to be derived from the
following methods:
 Accounting Profit – The value of goodwill is equal to the value of the
average annual net profit for a specified past number of years, which
often referred to as x years’ purchase of the net profits.

 Super Profit – Super profit is the value of net profit after taking into
consideration of salary paid to the partners and interest paid on the
capital invested by the partners. Value of goodwill is arrived at by
multiplying this super profit with an agreed number.
• It can also be derived by using ratio basis for which partly of the
goodwill amount has been valued at the earlier stage. This will be
based on reverse proportion of the profit sharing ratio assigns to the
partners.

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 Method 1 – Accounting profit

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 Method 2 – Super profit

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 Method 3 – Ratio

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 Please refer to:
 Comprehensive Example 2 (changes at the
beginning/end of accounting period)

 Comprehensive Example 3 (changes during

the accounting period)

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THANK YOU

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