Occasions for Reconstitution of a Firm

On the following occasions the reconstitution of the firm takes place:

  1. Change in the profit sharing ratio of the existing ratio.
  2. Admission of a new partner.
  3. Retirement of an existing partner.
  4. Death of a partner.
  5. Amalgamation of two partnership firms.

Meaning of change in profit sharing ratio:

            If a partner transfers a part of his share of profit to another partner, it is known as change in profit sharing ratio among existing partner. In this the one partner purchases the share of profit from another partner. A change in profit sharing is one of the mode of the reconstituting the firm.

Need for change in profit sharing ratio:

The need for change in profit sharing ratio arises in the following circumstances:

  1. When the partners so decide.
  2. When a new partner is admitted.
  3. When a partner retires.
  4. When a partner dies.

Various Adjustments required at the time of change in profit sharing ratio:

  1. Adjustment in profit sharing ratio.
  2. Adjustment of Goodwill.
  3. Adjustment of profit/loss on revaluation of assets and liabilities.
  4. Adjustment of Reserves/accumulated Profits
  5. Adjustment of capitals