Partnership Change in PSR Notes4

Study Material & Notes for the Chapter 3

Partnership - Change in Profit Sharing Ratio


Partners reevaluate market value of Fixed Assets and remeasure Current Assets and Current Liabilities. Any change in the value of Assets/Liabilities is dealt via Revaluation Account and the resultant gain/loss is shared amongst the existing partners in their current profit-sharing ratio.

Case-1 When Partners decide to show the effect of Revaluation in the Balance Sheet
A. Accounting Treatment under various scenarios

Table 4.4.A1

 Important to Note:
  • Language in the question: AT/To means new value of the Asset/Liability.
  • Language in the question: By means difference between existing value and new value of the Asset/Liability.
B. Preparation of Revaluation Account
  1. On the Revaluation of Assets and Reassessment of Liabilities, a new account is opened Revaluation Account
  2. Revaluation Account is a nominal account. As per nominal rule all the expenses & losses are debited and all the incomes/gains/profits are credited

Revaluation Account

Table 4.4.B1

* Only one will appear at a time

  • When Revaluation Account is prepared, assets and Liabilities appear in the Balance Sheet of the reconstituted firm at their revised (changed) values
C. Expenses on reconstitution of the Firm

Table 4.4.C1

  1. Firm gives contract to partner including expenses or excluding expenses
  2. Treatment when contract to partner is inclusive of expenses
Case-2 When Partners decide to carry old values in the Balance Sheet-Memorandum Revaluation Account
  • Applicable when revised (changed) values of assets and liabilities are not to be recorded
  • Gain (Profit) or Loss on Revaluation of Assets and Reassessment of Liabilities is adjusted through Capital Accounts by passing an adjustment entry by debiting/crediting the Capital/Current Accounts of gaining partners and crediting/debiting the sacrificing partners


a)  Calculation of the Net Effect of Revaluation

Table 4.4.C2

b)  Calculate Sacrificing/Gaining Ratio = Old Share – New Share


c)  Calculate share of Gaining and Sacrificing Partner in the Net Effect (computed in step a)

Journal Entry – In case of Gain/Profit on Revaluation

Table 4.4.C3

Journal Entry – In case of Loss on Revaluation

Table 4.4.C4

 Important to Note: The Assets and Liabilities remain at the book value.  No adjustment in the Balance Sheet of the revalued assets/liabilities  
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