Partnership Accounts
nershipCHAPTER 2
RECONSTITUTION OF A PARTNERSHIP FIRM
Partnership is an agreement between the members of a firm for sharing the profits of the business carried on by all or any of them acting for all. Any change in this relationship amounts to reconstitution of the partnership firm. A change in the partnership agreement brings to an end the existing agreement and a new agreement comes into being. This new agreement changes the relationship among the members of the partnership firm. Hence, whenever there is a change in the partnership agreement, the firm continues but it amounts to the reconstitution of the partnership firm. Reconstitution of the firm can take place on the following occasions : l LEARNING OBJECTIVES After studying this chapter, you will be able to : l Explain the concept of reconstitution of partnership firm; Describe the accounting implications of change in profit sharing ratio amongst existing partners; Explain the accounting implications for change in capital contributions; Describe the need for revaluation of assets and reassessment of liabilities; Carry out the treatment for reserves/accumulated profits or losses among the partners; Develop the skill of preparing the balance sheet of the reconstituted firm.
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Change in the profit sharing ratio of the existing partners : For example, Ram, Mohan and Sohan are partners in the firm sharing profits in the ratio of 3:2:1. With effect from April 1, 2001, they decided to share profits equally. Here, change in the existing profit sharing ratio results into reconstitution of the firm.
RECONSTITUTION OF A PARTNERSHIP FIRM l
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Admission of a new partner : For example, Hari and Haqque are partners sharing profit in the ratio of 3:2. On April 1, 2003 they admitted John as a new partner with 1/6th share in the profits of the firm. In this case, with the admission of John the firm is reconstituted. Retirement of an existing partner : For example, Roy, Ravi and
RECONSTITUTION OF A PARTNERSHIP FIRM
Partnership is an agreement between the members of a firm for sharing the profits of the business carried on by all or any of them acting for all. Any change in this relationship amounts to reconstitution of the partnership firm. A change in the partnership agreement brings to an end the existing agreement and a new agreement comes into being. This new agreement changes the relationship among the members of the partnership firm. Hence, whenever there is a change in the partnership agreement, the firm continues but it amounts to the reconstitution of the partnership firm. Reconstitution of the firm can take place on the following occasions : l LEARNING OBJECTIVES After studying this chapter, you will be able to : l Explain the concept of reconstitution of partnership firm; Describe the accounting implications of change in profit sharing ratio amongst existing partners; Explain the accounting implications for change in capital contributions; Describe the need for revaluation of assets and reassessment of liabilities; Carry out the treatment for reserves/accumulated profits or losses among the partners; Develop the skill of preparing the balance sheet of the reconstituted firm.
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Change in the profit sharing ratio of the existing partners : For example, Ram, Mohan and Sohan are partners in the firm sharing profits in the ratio of 3:2:1. With effect from April 1, 2001, they decided to share profits equally. Here, change in the existing profit sharing ratio results into reconstitution of the firm.
RECONSTITUTION OF A PARTNERSHIP FIRM l
61
Admission of a new partner : For example, Hari and Haqque are partners sharing profit in the ratio of 3:2. On April 1, 2003 they admitted John as a new partner with 1/6th share in the profits of the firm. In this case, with the admission of John the firm is reconstituted. Retirement of an existing partner : For example, Roy, Ravi and