Match List I with List II: Choose the correct answer from the options given below:List – I List – II A. Sacrificing Ratio I. New Ratio – Old Ratio B. New Ratio II. Old Ratio – New Ratio C. Gaining Ratio III. Old Ratio + Gaining Ratio D. Value of Goodwill IV. Average profit × No. of years purchase
A-II, B-III, C-I, D-IV
Understanding Partnership Ratios and Goodwill Valuation
This question asks us to match key terms related to partnership accounting adjustments with their corresponding formulas or valuation methods. Let's break down each item in List I and find its correct match in List II.
| List I (Terms) | List II (Formulas/Methods) |
| A. Sacrificing Ratio | I. New Ratio – Old Ratio |
| B. New Ratio | II. Old Ratio – New Ratio |
| C. Gaining Ratio | III. Old Ratio + Gaining Ratio |
| D. Value of Goodwill | IV. Average profit × No. of years purchase |
Matching List I with List II
Let's examine each item from List I:
- A. Sacrificing Ratio: When there is a change in the profit-sharing ratio or admission of a new partner, some existing partners may give up a part of their share of profit in favour of others. The ratio in which they give up their share is called the Sacrificing Ratio. The formula to calculate a partner's sacrifice is their old share minus their new share. This matches with List II, item II. Old Ratio – New Ratio.
- B. New Ratio: The New Ratio is the revised profit-sharing ratio among partners after a change in the partnership agreement (e.g., admission, retirement, change in existing ratios). If a partner is gaining, their new ratio is their old share plus the share they gained. List II, item III. Old Ratio + Gaining Ratio represents one way to arrive at the new ratio for a gaining partner.
- C. Gaining Ratio: When there is a change in the profit-sharing ratio or retirement/death of a partner, some remaining partners may gain a part of the share previously held by others. The ratio in which they gain is called the Gaining Ratio. The formula to calculate a partner's gain is their new share minus their old share. This matches with List II, item I. New Ratio – Old Ratio.
- D. Value of Goodwill: Goodwill is the value of the reputation of a business. It is often valued at the time of changes in partnership. One common method for valuing goodwill is based on average profits of past years, multiplied by a certain number of years purchase. List II, item IV. Average profit × No. of years purchase represents the valuation of goodwill using the average profit method.
Consolidating the Matches
Based on our analysis, the correct matches are:
- A matches with II (Sacrificing Ratio = Old Ratio – New Ratio)
- B matches with III (New Ratio = Old Ratio + Gaining Ratio)
- C matches with I (Gaining Ratio = New Ratio – Old Ratio)
- D matches with IV (Value of Goodwill = Average profit × No. of years purchase)
Putting this together, the correct combination is A-II, B-III, C-I, D-IV.
Revision Table: Partnership Accounting Formulas
| Term | Formula/Method | Purpose |
| Sacrificing Ratio | Old Ratio $ - $ New Ratio | To determine the proportion of profit share given up by partners. |
| Gaining Ratio | New Ratio $ - $ Old Ratio | To determine the proportion of profit share gained by partners. |
| New Ratio (for gaining partner) | Old Ratio $ + $ Gaining Ratio | To calculate the revised profit share after adjustments. |
| New Ratio (for sacrificing partner) | Old Ratio $ - $ Sacrificing Ratio | To calculate the revised profit share after adjustments. |
| Value of Goodwill (Average Profit Method) | Average Profit $ \times $ No. of Years Purchase | To estimate the monetary value of the firm's reputation. |
Additional Information: Partnership Accounting Concepts
Understanding these ratios and goodwill valuation methods is crucial in partnership accounting, especially during events like:
- Admission of a New Partner: Existing partners usually sacrifice a part of their share to the new partner, leading to calculation of Sacrificing Ratio and valuation/adjustment of goodwill.
- Retirement or Death of a Partner: The remaining partners gain the retiring/deceased partner's share, leading to calculation of Gaining Ratio and valuation/adjustment of goodwill.
- Change in Profit Sharing Ratio among Existing Partners: Some partners sacrifice, while others gain, requiring calculation of both Sacrificing and Gaining Ratios and adjustment of goodwill.
Different methods exist for goodwill valuation, such as the Super Profit Method and Capitalization Method, in addition to the Average Profit Method discussed here. The method used often depends on the specific partnership agreement.
Important Questions from Reconstitution of a Partnership: Change in Profit Sharing Ratio
What are the matters that need adjustments at the time of Reconstitution of partnership?
(A) Preparation of Realisation A/c
(B) Calculation of Sacrificing ratio
(C) Distribution of accumulated profits
(D) Valuation of goodwill
(E) Preparation of partner’s loan A/c
Choose the correct answer from the options given below:
An extract of Balance Sheet as on 31 March 2023:
Liabilities ₹ Assets ₹ Provision for legal damages 4,800 Furniture 41,000 Premises 85,000 Additional Information:
Premises found under-valued by 15% and provision for legal damages to be created up to ₹6,000.
On the basis of above information, the journal entry at the time of reconstitution of firm is:
Book debts were ₹1,00,000 as given in the balance sheet as on 31st March, 2022. On 1st April, 2022 the partners decided to share profits equally instead of distributing the profits in their capital ratio. On the date, bad debts for ₹40,000 were written off and a new provision for doubtful debt is to be maintained @5%. How will you treat their adjustment in revaluation account of the firm?
Which of the following will affect the Revaluation Gain or Loss at the time of reconstitution?
A. Undervaluation of Building
B. Overvaluation of Stock
C. Valuation of Goodwill
D. Reserve appearing in Books
E. Unrecorded Assets
Choose the correct answer from the options given below:
Consider the following facts related to Revaluation Account, its adjustments and treatment of reserves.
A. Revaluation profit is distributed in the capital ratio of the partners.
B. Revaluation Account is considered as Nominal Account.
C. When all debtors are good, existing provision for doubtful debt is not distributed and continued in future.
D. Under-valuation of Inventories is adjusted on the credit side of Revaluation A/c.
E. Excess amount of workmen compensation claim over workmen compensation reserve is transferred to debit side of Revaluation A/c.
Choose the correct answer from the options given below:
