Chandan, Ravi and Mahesh were partners in a firm sharing profits and losses in the ratio of 5 : 4 : 1. From 1st April, 2025 they decided to share the future profits in the ratio of 3 : 2 : 1. On that date there existed a general reserve of Rs. 7,00,000 in the books of the firm which they decided to distribute among themselves. In which ratio will the general reserve be distributed among the partners? OR Suman and Tanya were partners in a firm sharing profits and losses in the ratio of 2 : 1. With effect from 1st April, 2025, they decided to share the profits equally. On that date furniture was appearing in the books of the firm at Rs. 4,50,000. At the time of change in the profit sharing ratio, it was found to be undervalued by 10%. In the new balance sheet, furniture will be shown at :
Chandan, Ravi and Mahesh were partners in a firm sharing profits and losses in the ratio of 5 : 4 : 1. From 1st April, 2025 they decided to share the future profits in the ratio of 3 : 2 : 1. On that date there existed a general reserve of Rs. 7,00,000 in the books of the firm which they decided to distribute among themselves. In which ratio will the general reserve be distributed among the partners? OR Suman and Tanya were partners in a firm sharing profits and losses in the ratio of 2 : 1. With effect from 1st April, 2025, they decided to share the profits equally. On that date furniture was appearing in the books of the firm at Rs. 4,50,000. At the time of change in the profit sharing ratio, it was found to be undervalued by 10%. In the new balance sheet, furniture will be shown at :
Options
Correct option: (B) Old profit sharing ratio.
The general reserve of Rs. 7,00,000 existed in the books BEFORE the change in profit-sharing ratio, meaning it was accumulated while the partners shared profits in the OLD ratio (5:4:1). Hence, on distribution, it must be credited to partners' capital/current accounts in the old ratio.
Marking Scheme
- 11 mark: for correctly selecting option (B) Old profit sharing ratio, since the reserve was accumulated before the change took effect.
Hint
Reserves and accumulated profits existing on the date of change always go to partners in the OLD ratio, not the new one.
Quick Oral Answer
Since the general reserve existed before the ratio change, it belongs to the period when partners shared profits 5:4:1, so it must be distributed in the old ratio, making option (B) correct.
Analysis & Explanation
Concept: Whenever there is a change in the profit-sharing ratio, any accumulated reserves, undistributed profits, or losses appearing in the Balance Sheet on the date of change belong to the period before the change and must be distributed among partners in their OLD profit-sharing ratio (unless the deed states otherwise), because that is the ratio in which the partners had a claim on such profits when they were earned/retained.
Journal entry:
| Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| General Reserve A/c Dr. | 7,00,000 | |
| To Chandan's Capital A/c (5/10) | 3,50,000 | |
| To Ravi's Capital A/c (4/10) | 2,80,000 | |
| To Mahesh's Capital A/c (1/10) | 70,000 |
Why other options are wrong:
- (A) New profit sharing ratio is wrong — reserves accumulated before the change belong to the old ratio, not the new one.
- (C) Sacrificing/Gaining ratio is used to adjust goodwill compensation between partners, not for distributing existing reserves.
- (D) Equally is incorrect unless the old ratio itself was equal, which it is not (5:4:1 here).
OR Part (b) — for reference: Furniture of Rs. 4,50,000 undervalued by 10% means book value = 90% of true value, so Rs. 5,00,000, option (D), and the new Balance Sheet will show furniture at this revalued figure.
Common Mistakes
- 1Distributing existing reserves in the NEW ratio instead of the old ratio, confusing this with the treatment of future profits.
- 2Confusing distribution of reserves with the treatment of goodwill adjustment, which uses the sacrificing/gaining ratio, not the old ratio directly for reserves.
- 3In the OR part, computing true value of furniture by adding 10% of the book value instead of correctly grossing it up (book value is 90% of true value, not true value minus 10%).
Interesting Facts
A change in profit-sharing ratio among existing partners is itself treated as a form of 'reconstitution' of the partnership, requiring the same revaluation and reserve-adjustment procedure as admission or retirement of a partner.
If partners choose NOT to distribute reserves and instead carry them forward, an adjustment entry is passed through partners' capital accounts using the gaining/sacrificing ratio to achieve the same net effect without actually closing the reserve account.
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Frequently Asked Questions
Why is the general reserve distributed in the OLD ratio and not the new ratio?
Because the reserve was built up out of profits earned while the partners shared profits in the old ratio. Distributing it in the new ratio would unfairly give partners a share of profits accumulated before they held that share, so accounting convention requires using the old ratio.
What if the partners decide not to distribute the reserve at all?
If reserves are to be carried forward unchanged in the books, an adjustment entry is passed directly through partners' capital accounts, debiting the gaining partner(s) and crediting the sacrificing partner(s) with their share of the reserve, achieving the same economic effect without closing the reserve account.