Class 12 Accountancy TS Grewal Solutions Volume 1 Chapter 4 Change in Profit – Sharing Ratio Among the Existing Partners
FAQs on TS Grewal Class 12 Accountancy Volume 1 Chapter 4 Solutions
1. How do you correctly calculate the sacrificing ratio and gaining ratio when solving problems from TS Grewal Chapter 4?
To find the correct answer when solving problems on 'Change in Profit Sharing Ratio', you must follow a clear method for calculating the sacrificing and gaining ratios. The sacrificing ratio determines the proportion of profit surrendered by a partner, while the gaining ratio shows the proportion acquired. The step-by-step calculation is as follows:
Sacrificing Ratio Formula: Old Profit Share – New Profit Share
Gaining Ratio Formula: New Profit Share – Old Profit Share
A positive result from the first formula indicates a sacrifice. A positive result from the second formula indicates a gain. The sum of all partners' sacrifices must equal the sum of all partners' gains.
2. What is the step-by-step method for the accounting treatment of Goodwill when the profit-sharing ratio changes, as per the 2025-26 CBSE syllabus?
As per the CBSE 2025-26 guidelines, when the profit-sharing ratio changes, Goodwill is adjusted through the partners' capital accounts without opening a Goodwill Account. The correct procedure is:
Step 1: Calculate the total value of the firm's goodwill on the date of reconstitution.
Step 2: Determine the share of profit gained or sacrificed by each partner using the formulas (Old Ratio - New Ratio for sacrifice; New Ratio - Old Ratio for gain).
Step 3: Calculate the proportionate amount of goodwill for the gaining and sacrificing partners by multiplying the firm's goodwill by their respective gaining/sacrificing shares.
Step 4: Pass a single adjusting journal entry: Gaining Partner's Capital A/c (Dr.) to Sacrificing Partner's Capital A/c (Cr.).
3. How should a Revaluation Account be prepared step-by-step when solving questions on the change in profit-sharing ratio?
Preparing a Revaluation Account is a nominal account created to record changes in the value of assets and liabilities. The correct 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.
Finally, balance the account. A credit balance indicates a profit on revaluation, while a debit balance indicates a loss on revaluation. This profit or loss is then transferred to the partners' capital accounts in their old profit-sharing ratio.
4. What is the correct journal entry procedure for distributing accumulated profits and reserves in the solutions for this chapter?
When solving problems from this chapter, accumulated profits and reserves (like General Reserve, Workmen Compensation Reserve after claim, etc.) must be distributed among the partners in their old profit-sharing ratio. The correct journal entry is:
For Profits and Reserves:
General Reserve A/c Dr.
Profit & Loss A/c (Credit Balance) Dr.
Workmen Compensation Reserve A/c (Excess) Dr.
To All Partners’ Capital/Current A/cs (in Old Ratio)For Accumulated Losses:
All Partners’ Capital/Current A/cs (in Old Ratio) Dr.
To Profit & Loss A/c (Debit Balance)
To Deferred Revenue Expenditure A/c
5. Why is it crucial to treat Goodwill through the partners' capital accounts instead of raising a Goodwill account in the books when the PSR changes?
It is crucial to adjust Goodwill through partners' capital accounts because, according to Accounting Standard 26 (AS-26) on Intangible Assets, self-generated goodwill cannot be recorded as an asset in the books of accounts. Raising a Goodwill account would violate this principle. The change in PSR is an internal reconstitution; no consideration is paid for goodwill. Therefore, the gaining partner simply compensates the sacrificing partner for their share of the future profits foregone, which is achieved by directly debiting the gaining partner's capital and crediting the sacrificing partner's capital.
6. In solving problems, why must the profit or loss on revaluation be distributed in the *old* profit-sharing ratio and not the new one?
The profit or loss on revaluation must be distributed in the old profit-sharing ratio because this gain or loss relates to the period before the reconstitution of the firm. The increase or decrease in the value of assets and liabilities occurred while the partners were sharing profits and losses in their old ratio. Therefore, they have a right (or obligation) to share the revaluation results in that same historical proportion. Using the new ratio would unfairly benefit gaining partners at the expense of sacrificing partners for value changes that happened in the past.
7. What is the conceptual difference between distributing existing reserves and passing a single adjustment entry for them, and when is each method applied?
The two methods serve different purposes based on the partners' decision:
Distributing Reserves: This method is used when partners decide to close the reserve accounts and transfer the balance to their capital accounts. The reserves no longer appear in the new balance sheet. This is the default treatment unless specified otherwise.
Passing a Single Adjustment Entry: This method is used when partners decide not to alter the book values of reserves and want them to appear in the new balance sheet. An adjustment entry (Gaining Partner's Capital A/c Dr. to Sacrificing Partner's Capital A/c Cr.) is passed for the net effect, similar to the treatment of goodwill. This ensures the gaining partner compensates the sacrificing partner for the future claim on those reserves.
8. How does an unrecorded liability discovered during revaluation impact the final solution in a Chapter 4 problem?
An unrecorded liability has a two-fold impact on the solution:
On the Revaluation Account: The unrecorded liability is an expense that reduces the firm's net worth. It is recorded by debiting the Revaluation Account, which either reduces the revaluation profit or increases the revaluation loss.
On the New Balance Sheet: The liability must be shown on the liabilities side of the new Balance Sheet prepared after the reconstitution. Failing to account for it in both places will lead to an incorrect calculation of revaluation profit/loss and an imbalanced Balance Sheet.
