Treatment of Goodwill at Change in Profit Sharing Ratio.

Question

Sir why do we debit the partner's a/c who is gaining and credit the one who is sacrificing ,while sharing goodwill ?

Answer 1

Let me explain with the help of this example.

Let us assume that A and are two partners and their profit sharing ratio is 3:2.  If they decide to share profits equally in future, it means A is selling a part of his share in the business to B.  Am I right?  How much A lose?

A sacrifices (3/5 - 1/2) = 1/10.  A loses 1/10 share in business and B gains the same.   If Goodwill of the firm is Rs.100000, B should compensate A by Rs.10000 (Rs.100000 x 1/10)  Journal entry for that will be:

B's Capital A/c      Dr.   10000

   To A's Capital A/c                    10000

Answer 2

First, review the rule of personal a/c

Debit the receiver, credit the giver

When you give up your share in business to others then you receive money against it. Means you sold your share and the second party will give you the value of your share.

Then you are the receiver of money so your a/c debited

Second party is giver so his a/c credited.

You receive money against your loss,

Second party give money against his gain.

If you like this please vote positive thanks

Comments

I need help 

P ,Q,R are partners in 4:3:3 ratio. The new ratio is fixed 2:2:1. On this day goodwill was valued at rs48000 show adjustment journal entry for goodwill

 

---

First of all let us find out who gained and who lost due to this change in profit sharing ratio:

            New Ratio             -       Old Ratio     = Gain

P               2/5                   -           4/10           =  0 (No gain, no loss)

Q               2/5                   -           3/10           =  1/10 (Gain)

R               1/5                   -           3/10           = -1/10 (Loss)       

This means due to this change in profit sharing ratio R has lost 1/10 share in partnership and Q has gained this share.  Due to this Q must compensate R for 1/10 of goodwill.

Full Value of goodwill      = Rs.48000

Value of 1/10 of goodwill =  Rs.48000 X 1/10 = Rs.4800

Journal entry would be:

Q’s Capital A/c          Dr.  4800

   To R’ Capital A/c                     4800

---

Thank you so much

i have two more doubts

question 1

sunil ( a partner ) devotes twice as much time as other partners and claims a salary of rs5000 per month. State with reason whether his claim is valid or not.

question 2

X,Y,Z decided to change their profit sharing ratio and this result to X gains 1/30 , Y sacrifice by 5/30 and Z gain by ------- ? If goodwill of the firm is calculated as rs900000 . Pass journal entry for change in profit sharing ratio.

---

Answer 1:As per Partnership Act, 1932  no partner is entitled to any salary unless provided in the Partnership Deed or mutually agreed.  In the present case Sunil is working more than other partners but he is not entitled to any salary as there is no agreement among partners on this point.

Answer 2 : Y’s  sacrifice -  X’s gain  = Z’ gain

        5/30       –    1/30      =  4/30

Value of Goodwill is Rs.90,000.  Value of 5/30 share will be (90,000 X 5/30) Rs.15,000.  Gaining ratio of Z and X is 4/30 : 1/30 or 4 : 1.  The journal entry for this will be:

Z’s Capital A/c      Dr.   12,000

X’s Capital A/c      Dr.     3,000

   To Y’s Capital A/c                      15,000

(Z and X debited in their gaining ratio 4:1 on

account of Goodwill Adjustment)

---

Thank you so much

i have one more doubt

information

- average capital employed in the business is rs700000

- net trading results of the firm for the past year profit 2009- 147600 , loss 2010- rs148100 ,profit 2011- rs448700

- rate of intrest expected from capital having regard to the risk involved 18./.

- remuneration to each partner for his service rs500 per month

find value of goodwill on the basis of last three year profits, of a firm of gupta

(a) by average profit method

(b) by super profit method

(c) by capitalization of average profit method

(d) by capitalization of super profit method

---

Find the answer to your above question on the following link:

http://www.jbsclasses.com/q2a_link/index.php?qa=2396&qa_1=methods-of-calculating-goodwill