Class 12 DK Goel Solutions Volume 1 Chapter 2 - Change in Profit Sharing Ratio Among the Existing Partners
FAQs on DK Goel Class 12 Accountancy Volume 1 Chapter 2 Solutions
1. How do you correctly solve for the sacrificing ratio and gaining ratio as per the DK Goel Class 12 solutions for Chapter 2?
To solve for the sacrificing and gaining ratios when profit-sharing ratios change, you must follow a two-step method. First, calculate each partner's sacrifice or gain, and then express it as a ratio.
- Sacrificing Ratio: This is calculated using the formula: Old Profit Share – New Profit Share. A positive result indicates a sacrifice.
- Gaining Ratio: This is calculated using the formula: New Profit Share – Old Profit Share. A positive result indicates a gain.
2. What is the step-by-step method for the accounting treatment of goodwill when the profit-sharing ratio among existing partners changes?
As per the CBSE 2025-26 guidelines and Accounting Standard 26, goodwill is adjusted through the partners' capital accounts without opening a Goodwill Account. The correct method is:
- Step 1: Calculate the total value of the firm's self-generated goodwill on the date of reconstitution.
- Step 2: Determine the sacrificing and gaining ratio for all partners.
- Step 3: Calculate the proportionate amount of goodwill for each sacrificing and gaining partner.
- Step 4: Pass a single adjustment journal entry: Gaining Partner's Capital A/c Dr. To Sacrificing Partner's Capital A/c. This entry compensates the sacrificing partners for their loss of future profits.
3. How do you prepare a Revaluation Account to solve problems from DK Goel Chapter 2?
Preparing a Revaluation Account involves recording the change in the value of assets and liabilities. The steps are:
- Debit the Revaluation Account for any decrease in the value of assets and any increase in the value of liabilities.
- Credit the Revaluation Account for any increase in the value of assets and any decrease in the value of liabilities.
- Record any unrecorded assets on the credit side and any unrecorded liabilities on the debit side.
- The final balance of the account represents either a profit (credit balance) or a loss (debit balance), which must be transferred to the partners' capital accounts in their old profit-sharing ratio.
4. What is the correct accounting treatment for accumulated profits like General Reserve when partners change their profit-sharing ratio?
Accumulated profits and reserves belong to the partners in their old profit-sharing ratio. When the ratio changes, these must be distributed to settle the partners' claims. The correct solution is to transfer the entire amount of the General Reserve or other accumulated profits to the partners' capital accounts in their old ratio. The journal entry is:
General Reserve A/c Dr.
Profit & Loss A/c (Credit Balance) Dr.
To All Partners’ Capital/Current A/cs (in Old Ratio)
5. Why is it necessary to pass an adjustment entry for goodwill when the profit-sharing ratio changes, even if no cash is involved?
Goodwill represents the firm's future earning capacity or super-profits. When the profit-sharing ratio changes, some partners (gaining partners) acquire a larger share of these future profits at the expense of others (sacrificing partners). The adjustment entry for goodwill is an accounting mechanism to compensate the sacrificing partners for the share of future profits they are giving up. It ensures that the partner who gains in the future pays for that gain to the partner who is sacrificing.
6. What is the critical difference in the solution for goodwill appearing in the books versus self-generated goodwill during a change in profit-sharing ratio?
There is a fundamental difference in their treatment:
- Existing Goodwill (in Balance Sheet): As per AS-26, this goodwill must be completely written off before any other adjustment. It is debited to all partners' capital accounts in their old profit-sharing ratio.
- Self-Generated Goodwill (Valued at Reconstitution): This goodwill is not recorded in the books. Its value is used only to calculate compensation. The effect is given through a single adjustment entry debiting the gaining partners and crediting the sacrificing partners.
7. How does the accounting treatment for accumulated losses differ from that of accumulated profits when solving Chapter 2 problems?
The treatment is the exact opposite. While accumulated profits (like General Reserve) are credited to partners' capital accounts to increase their capital, accumulated losses (like a debit balance in the P&L Account) represent a reduction in capital. Therefore, accumulated losses must be debited to the partners' capital accounts in their old profit-sharing ratio to write them off. This ensures that past losses are borne by partners in the same ratio in which they were supposed to be shared.
8. What if partners decide not to change the book values of assets and liabilities? How do you solve for the effect of revaluation?
If partners wish to keep asset and liability values unchanged in the new Balance Sheet, a Revaluation Account is not prepared. Instead, the net effect is passed through a single adjustment entry. The steps are:
- Calculate the net effect of revaluation (total increase in value - total decrease in value) to find the notional profit or loss.
- Determine the gaining and sacrificing ratios of the partners.
- Pass an adjustment entry: Gaining Partner’s Capital A/c Dr. To Sacrificing Partner’s Capital A/c with the net revaluation profit. The entry is reversed for a net revaluation loss.
