Change in Profit Sharing Ratio Meaning of Change in Profit Sharing Ratio
Changing in Profit sharing ratio means to change the ratio from old ratio to new ratio . Now , we think , why did partner take this decision ? Very simple answer . They normally take this decision when they see that division among the partner is not good . For example , you are 4 brothers . You are living in a big house . Now , you have decided to divide this . If one of your brother got 70 % proportion and other three is just getting 30 % proportion . It will be real Justice . Actually , 90 % is 90 / 100 or 9 / 10 and 30 % is 30 / 100 or 3 / 10 . So , their ratio is 7 : 1 : 1 : 1 . So , it is not good . Every brother should have equal right . They have to get 25 %. So , three brother went to court and court has given decision to change the ratio from 7 : 1 : 1 : 1 to 1 : 1 : 1 : 1 .
Above example is just for your learning . Like this , when a partner sees that he bring more capital . He does more work but he gets less proportion of profit . He can demand share of profit in total profit . At that time , other partner may agree to change the ratio for giving him more proportion .
How to Change in Profit Sharing Ratio
Changing in profit sharing ratio is done on the basis of justice rule . When we change the ratio from old to new , it will give more benefit to some partner , it may give more loss to other partner . So , all the partners who will suffer loss of profit due to changing in the profit sharing ratio . So , gaining partners will give money to loss suffering partners if their capital is already equal or on past agreement basis . This money can be given in the form of goodwill . Goodwill is intangible asset but for getting other partner ' s share , it can be given .
Let me explain with an example
A and B are two partner . They divide the profit in the ratio of 5 : 3 , it means 62.5 : 37.5 or 62.5 % and 37.5 %. Now , they decided to divide in 3 : 1 . It means new ratio will be 75 : 25 or 75 % for A and 25 % for B . It means , A is getting 75 % - 62.5 % = 12.5 % benefit after changing in the ratio and B is suffering 12.5 % loss after changing in the ratio . So , it is the duty of A that he should pay the money in the form of goodwill to b .
Suppose , total goodwill is Rs . 20,000 and its 12.5 % is Rs . 2500 which is