Partnership Change in PSR Notes2

Study Material & Notes for the Chapter 3

Partnership - Change in Profit Sharing Ratio

II.   ACCOUNTING FOR GOODWILL

  1. If Partners decide to change their profit-sharing ratio, the gaining partner must compensate the sacrificing partner 
  2. The compensation by gaining partner to the sacrificing partner is payment of Goodwill in the gaining ratio
  3. If Partner B gained 1/10 of the share and Partner A scarified 1/10 of the share and  goodwill of the Firm is Rs. 5,00,000/- then Partner B should compensate Partner A for: Rs. 5,00,000  X (1/10)= Rs. 50,000/-  
Case-1 Goodwill is not appearing in the books of accounts
Method-1 Goodwill is raised and then written off

Table 4.2.M1

Method-2 Goodwill is adjusted through Partners’ Capital Accounts

Table 4.2.CM2

 Important to Note: If question is silent, treat Capital Accounts as Fluctuating

Case-2 Goodwill is appearing in the books of accounts
Method-1 Existing Goodwill is written off
Table 4.2.CM1

 Important to Note: If question is silent, Method-1 is the preferred treatment

Method-2 Effect is given to the net increase or decrease in goodwill
Table 4.2.CM2

Attention Students!!!


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