John, Janardan and Javed are partners in a firm. Their existing profit sharing ratio is 5 : 3 : 2. From 1st April 2025, they decide to share the future profits in the ratio 3 : 2 : 1. Workmen compensation reserve is appearing in the balance sheet on this date, if no information is available for the same, then it will be:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Distributed among the partners in old profit sharing ratio
Reserves and accumulated profits belong to the partners who built them up, so at a change in the profit sharing ratio they go to the capital accounts of all the partners in the old ratio. A Workmen Compensation Reserve is such a reserve unless a known claim is to be met out of it, and the question gives no information about any claim.
Why the other options are incorrect
Option (2) Distributed among the partners in capital ratio — Incorrect. Past profits are shared in the ratio in force when they were earned; the capital ratio has no part in it.
Option (3) Distributed among the partners in new profit sharing ratio — Incorrect. The new ratio governs only profits earned from 1st April 2025; using it would shift past profits from one partner to another.
Option (4) Carried forward to new balance sheet without any adjustment — Incorrect. It stays on the balance sheet only to meet a known claim; with no such information it is shared out.
NCERT (2026-27 edition): |