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The profit sacrificed or foregone by the previous partners in favour of the new partner is referred to as the sacrificing ratio. The goal of determining the sacrifice ratio is to calculate the goodwill that the new partner has brought in and the share of the forgoing partners. The sacrificed share is determined by subtracting the new profit share from the previous share.
This ratio must be computed by a partnership company. It aids in determining the amount of money that gaining partners would pay as compensation to sacrificing partners. Typically, such compensation is paid following the agreed-upon quantity of goodwill.
It should be mentioned that sacrificial partners are those whose profit share drops as the profit-sharing ratio of the partner changes. A gaining partner, on the other hand, is one whose profit share increases as the profit-sharing ratio of the partner changes.
The Formula for Sacrificing Ratio
The sacrificing ratio formula is:
Sacrificing Ratio = Old Ratio excluding New Ratio.
Sacrificing Partner
The sacrificial partner is the one whose share reduces as the profit-sharing ratio changes.
Gaining Ratio
It is the ratio in which partners have agreed to receive a portion of the profits from the firm’s other partners.
Gaining Ratio is equal to New Ratio – Old Ratio.
Gaining Partner
The gaining partner is the one whose share grows as a result of the shift in profit sharing.
Difference between Sacrificing Ration and Gaining Ratio
| Aspect for Comparison | S.R | G.R |
| Meaning | The Sacrificing Ratio is the proportion in which the firm’s former partners give up or cancel their profit that would help the new partner | The Gaining Ratio is the proportion in which the firm’s partners get the departing partner’s profit share |
| Event | It includes the admission of a new partner, the purchase of a share from one of the other partners, or a mutually agreed-upon modification in the profit-sharing ratio | When a partner dies or retires, or when the profit-sharing ratio is changed by mutual agreement |
| Objective | When a new partner joins the firm, the amount of goodwill payable to the current partners must be determined | Determine the amount of goodwill that the remaining partners will pay to the departing partner |
| Effect on capital | The amount obtained as goodwill, brought to the firm by the new partner, will be added to the capital accounts of the previous partners | The goodwill is paid to the retired partner, and the amount paid as goodwill is deducted from the capital accounts of the partners who remain in the business |
Understanding Sacrificing Ratio
A and B are business partners who split profits in a 3:1 ratio. C is accepted into the partnership for a 1/8th profit share. Determine the sacrifice ratio.
Solution:
C obtains his share from A and B in their old profit-sharing ratio because C’s share is offered without specifying what C acquires from A and B individually. As a result, the sacrifices made by A and B are in the 3:1 ratio.
A’s sacrifice is equal to 1/8 * 3/4= 3/32,
B’s sacrifice is equal to 1/8 * 1/4= 1/32,
So, sacrificing ratio is very much equivalent to the Old ratio, i.e. 3:1.
Calculation of Sacrificing Ratio
In three separate situations, the sacrificing ratio is calculated differently. The following are some of them:
- When the share of a new or incoming partner is offered without revealing the facts of prior or present partners’ sacrifices.
The former partners are presumed to have waived their right to participate in the previous profit-sharing ratio in this circumstance. As a result, the sacrifice ratio is always the same as the profit-sharing ratio before it. As a result, the existing partners’ profit-sharing ratios will remain constant.
- When the previous partner ratio is given, as well as the new partner ratio for all partners. In this situation, subtracting the new share from the old share determines the sacrifice of each partner.
- When a fresh or prospective partner acquires a share by surrendering a portion of the existing partners’ shares.
To determine each old partner’s involvement in the reconstituted firm, subtract his surrendered portion from his old share.
The shares of existing partners that have been relinquished in favour of a new or incoming partner are added. It is the share of the new partner.
Conclusion
In general, old partners in a firm sacrifice their share to accommodate a new partner, either jointly or separately, and as a result of giving up their share in favour of the new partner, old partners receive a smaller share, and the ratio that calculates the sacrifice made by each partner is called the sacrificing ratio.
In contrast, when one of the partners retires, the remaining partners inherit the retiring partner’s share. This increases the former partner’s profit share, which is nothing more than the gain they receive. The gaining ratio is the ratio that is used to express the same.
