Change in Partners' Profit-Sharing Ratio (Cambridge International A-Level Accounting)
Spec point — how to prepare partners’ capital and current accounts to record changes required in respect of goodwill and revaluation of assets on: – a change in the partners’ profit-sharing ratio
Change in partners' profit-sharing ratio
How do I update partners' capital accounts when there is a change in the profit-sharing ratio?
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STEP 1 Calculate the net profit or loss on revaluation for each partner using the old ratio
- Debit the capital accounts if it is a net loss
- Credit the capital accounts if it is a net profit
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STEP 2 Calculate the share of the raised goodwill for each partner using the old ratio
- **Credit **the capital accounts
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STEP 3 Calculate the share of the** eliminated goodwill** for each partner using the new ratio
- Debit the capital accounts
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STEP 4 Balance the capital accounts
Worked Example Aggie and Chris are in a partnership. The partnership agreement stated that they shared profits and losses equally.
On 1 February 2026, the partnership agreement was changed. The profit-sharing ratio between Aggie and Chris became 3:2.
Balances at 31 January 2026 were:
$ Capital account Aggie 45 000 Chris 35 000 Premises (carrying amount) 100 000 Inventory 20 000
- The premises were revalued at $130 000.
- The inventory was revalued at $15 000.
- Goodwill on 1 February 2026 was valued at $30 000 although it was not to be retained in the books of account.
Prepare the capital accounts for Aggie and Chris on 1 February 2026.
Answer:
Calculate the net profit or loss on revaluation
$ Increase in premises $130 000 - $100 000 30 000 Decrease in inventory $20 000 - $15 000 (5 000) Profit on revaluation 25 000 Share the net profit using the old ratio
- These values will be credited to the capital accounts as it was a profit
Aggie:
1 half×$ 25 000=$ 12 500Chris:
1 half×$ 25 000=$ 12 500Calculate the share of goodwill using the old ratio
- These will be credited to the capital accounts
Aggie:
1 half×$ 30 000=$ 15 000Chris:
1 half×$ 30 000=$ 15 000Calculate the share of goodwill using the new ratio
- These will be debited to the capital accounts
Aggie:
3 / 5×$ 30 000=$ 18 000Chris:
2 / 5×$ 30 000=$ 12 000Make the entries into the capital accounts and balance the account
Aggie
$Chris
$Aggie
$Chris
$Feb 1 Goodwill 18 000 12 000 Jan 31 Balance b/d 45 000 35 000 Balance c/d 54 500 50 500 Feb 1 Revaluation 12 500 12 500 Goodwill 15 000 15 000 72 500 62 500 72 500 62 500 Balance b/d 54 500 50 500
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