Financial Statements with Changes in the Year

When a partner is admitted, retires or the ratio changes part-way through the year, the year is divided into two periods:

• Period 1: from the start of the year to the date of change (the old partnership).
• Period 2: from the date of change to the year-end (the new partnership).

Each period has its own:

• profit-sharing ratio,
• partners' salaries,
• interest on capital and interest on drawings rates,
• set of partners.

The first step is to apportion the profit for the year between the two periods, then prepare a separate appropriation for each. This ensures each set of partners is rewarded for their period on their terms.

The profit for the year is usually apportioned between the two periods on a time basis (the proportion of the year in each period):

$\text{Period profit} = \text{Annual profit} \times \frac{\text{Months in the period}}{12}$

Example. Annual profit $120,000; change after 8 months → Period 1 = 120,000 × 8/12 = $80,000; Period 2 = 120,000 × 4/12 = $40,000.

But watch the question's instructions:

• Some revenues or expenses may be specified as arising wholly in one period (e.g. a bonus, a one-off sale, extra rent after expansion) — allocate these to the correct period before/instead of time-apportioning.
• Trading profit is often time-apportioned, while specific items are allocated directly.

Read carefully: the examiner may give a gross profit that is time-based but expenses that change after the date of the change (e.g. a new partner's salary, higher rent).

After apportioning the profit, prepare a separate appropriation for each period:

• Interest on capital — calculate for the number of months in each period (e.g. for an 8-month period, interest = capital × rate × 8/12). Use the capital balances applicable to that period (after any change).
• Salaries — include only the salaries agreed for that period (a new partner's salary applies only to Period 2).
• Interest on drawings — charge for drawings made in each period.
• Residual profit — share in the ratio for that period (old ratio in Period 1, new ratio in Period 2).

Each partner's total for the year = their share from Period 1 + Period 2, posted to their current account. Laying out the two appropriations side by side (Period 1 | Period 2 | Total) is the clearest presentation.

The statement of financial position at the year-end reflects the new partnership:

• Capital accounts — the partners' balances after all change adjustments (goodwill, revaluation, capital introduced/withdrawn).
• Current accounts — each continuing partner's balance after both periods' appropriations and their drawings.
• Loan from a retired partner — any unpaid amount owed to a partner who left, shown as a liability.
• Revalued assets — non-current assets at their revalued amounts (if the partners chose to keep the revaluation in the books).

The statement is otherwise prepared as normal — the change only affects the capital section and any loan, plus the values of assets if revalued. A clear answer ties together the work from the goodwill, revaluation and appropriation subtopics into one coherent set of statements.