What are the matters that need adjustments at the time of Reconstitution of partnership?

A. Preparation of Realisation A/c

B. Calculation of Sacrificing ratio

C. Distribution of accumulated profits

D. Valuation of goodwill

E. Preparation of partner's loan A/c

Choose the correct answer from the options given below. 

B, C and D only

The correct answer is option 2- B, C and D only.

A. Preparation of Realisation A/c- Realisation account is prepared at the time of dissolution of partnership firm. When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be is transferred to partner’s capital accounts in their profit-sharing ratio. Hence, all assets (other than cash in hand bank balance and fictitious assets, if any), and all external liabilities are transferred to this account. It also records the sale of assets, and payment of liabilities and realisation expenses. The balance in this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in the profit sharing ratio.

B. Calculation of Sacrificing ratio- Sacrificing ratio is calculated at the time of reconsititution of the firm. Sacrificing Ratio represents the ratio by which an existing partner reduces their profit share to accommodate a new partner. It signifies the 'sacrifice' made by existing partners to bring in a new partner and calculated as: Old Ratio - New Ratio. 

C. Distribution of accumulated profits- At the time reconsititution of the firm, reserves are distributed between old or existing partners in their old ratio. Sometimes a firm may have accumulated profits not yet transferred to capital accounts of the partners. These are usually in the form of general reserve, reserve and/or Profit and Loss Account. The new partner is not entitled to have any share in such accumulated profits. These are distributed among the partners (existing partners) by transferring it to their capital or current accounts in old profit sharing ratio. Similarly, if there are some accumulated losses in the form of a debit balance of profit and loss account and/or deferred revenue expenditure appearing in the balance sheet of the firm, they are also debited to partners capital or current A/c.

D. Valuation of goodwill- Goodwill is valued at the time of reconsititution of the firm. Goodwill represents the value of the reputation and customer base of the firm. When a new partner is admitted, the existing goodwill of the firm may need to be adjusted to account for the new partner's contribution to the firm. If the new partner brings in additional value, goodwill may increase, and if the new partner's entry decreases the overall value, goodwill may decrease.

E. Preparation of partner's loan A/c- Partner's loan is settled at the time of dissolution of firm. Partners' outstanding loans are repaid in proportion to their loan balances, using the remaining cash in the Realization Account. So, The amount realized from assets along with contribution from partners, if required, shall be utilized first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans made by the partners to the firm. (in case the balance amount is not adequate enough to pay off such loans and advances, they are to be paid proportionately).