Adjust partners’ accounts when the profit-sharing ratio changes
Calculate sacrificing and gaining ratios, then record goodwill and revaluation adjustments before applying the new profit shares.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A partner's fraction rises from 1/4 to 2/5. What is the gain?
What you will learn
- Calculate old and new profit-sharing ratios
- Determine each partner's sacrifice or gain
- Record goodwill and asset revaluation adjustments in partners' accounts
The ratio change redistributes future profit
Write each partner's old and new profit share as a fraction. A partner's sacrifice is the old share less the new share when positive; a partner's gain is the new share less the old share when positive. The total sacrifices equal total gains.
If goodwill is to be adjusted, allocate compensation to sacrificing partners using their relative sacrifices and charge gaining partners using their relative gains. Record a separate revaluation gain or loss among the partners entitled under the old arrangement before applying the new ratio, unless the question or agreement specifies otherwise.
Reconcile the partners' balances
Use the method requested in the question. If goodwill is created then written off, show both stages; if a direct adjustment is required, post the net partner-account entries. Asset revaluation is distinct from goodwill and does not represent cash received or paid.
After the adjustment, check that total partner capital/current-account balances still reconcile to total equity. Then use the new profit-sharing ratio for future appropriation. State any assumption about whether goodwill remains in the statement of financial position.
Pause and explain
A land revaluation gain arises before a new ratio takes effect. Which ratio normally allocates the gain?
Worked example
A and B change from 2:1 to 1:1. Goodwill is valued at $30,000 and is adjusted directly. Calculate the transfer.
Show the worked solution
- A's old share is 2/3 and new share is 1/2; A sacrifices 1/6.
- B's old share is 1/3 and new share is 1/2; B gains 1/6.
- $30,000 × 1/6 = $5,000. Debit B's account and credit A's account.
Answer A receives a $5,000 credit and B a $5,000 debit. The adjustment changes partners' claims; it is not a cash payment.
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A and B change from 3:2 to 2:3. Goodwill is $25,000. Calculate the goodwill transfer using a direct partner-account adjustment.
Give me a hint
Find each old and new fraction, then compare.
Compare my reasoning
- A: 3/5 − 2/5 = 1/5 sacrificed.
- B: 3/5 − 2/5 = 1/5 gained.
- $25,000 × 1/5 = $5,000; debit B and credit A.
Credit A $5,000 and debit B $5,000. Total equity is unchanged by the direct goodwill compensation.
Look for these in your work
- Shares compared
- Relative sacrifice/gain identified
- Balanced adjustment recorded
A and B share 5:3, then change to 3:5. A revaluation before the change increases an asset by $16,000. Calculate the goodwill compensation at $40,000 and the revaluation allocation.
Give me a hint
Do goodwill share comparison separately from the pre-change asset gain.
Compare my reasoning
- A sacrifices 5/8 − 3/8 = 1/4; B gains 1/4.
- Goodwill compensation = $40,000 × 1/4 = $10,000 from B to A.
- The $16,000 revaluation gain is allocated in the old 5:3 ratio: A $10,000 and B $6,000.
Goodwill adjustment: debit B $10,000, credit A $10,000. Revaluation: credit A $10,000 and B $6,000 under the old ratio, subject to the agreed accounting method.
Look for these in your work
- Goodwill calculation separate
- Revaluation ratio correct
- Entries reconciled
A and B change profit shares because one partner will contribute substantially more work. They disagree about whether goodwill should be left as an asset. Explain what the accountant should establish before posting entries.
Give me a hint
Resolve the agreement and accounting method before calculating balances.
Compare my reasoning
- Confirm old and new profit shares and the effective date.
- Confirm the agreed goodwill value and whether partners' accounts are adjusted directly or through a goodwill account that is later written off.
- Confirm the partnership agreement's treatment of revaluation and goodwill remaining at the reporting date.
Document the effective ratio, valuation and posting method first. Then compute sacrifice/gain and revaluation separately, post the agreed entries and reconcile partner balances; do not assume goodwill remains as an asset.
Look for these in your work
- Effective terms confirmed
- Method confirmed
- Goodwill and revaluation separated
Common mistakes
- Using the new profit ratio to allocate a revaluation gain earned before the change
- Treating a goodwill adjustment as a cash transaction
What can you explain now?
A partner's share falls from 3/5 to 2/5. What is the partner's sacrifice?
Compare with the explanation
1/5
Sacrifice is the old share less the new share: 3/5 − 2/5 = 1/5.
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Make it stick
How do you find a partner's sacrificing share when an old ratio changes to a new ratio?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.