New profit sharing ratio and sacrificing ratio

New profit sharing ratio and sacrificing ratio

1. New profit sharing ratio

It is necessary to determine the new profit sharing ratio at the time of admission of a partner because the new partner is entitled to share the future profits of the firm. New profit sharing ratio is the agreed proportion in which future profit will be distributed to all the partners including the new partner. If the new profit sharing ratio is not agreed, the partners will share the profits and losses equally.

2. Sacrificing ratio

The old partners may sacrifice a portion of the share of profit to the new partner. The sacrifice may be made by all the partners or some of the partners. Sacrificing ratio is the proportion of the profit which is sacrificed or foregone by the old partners in favour of the new partner. The purpose of finding the sacrificing ratio is to share the goodwill brought in by the new partner. The share sacrificed is calculated by deducting the new share from the old share.

Share sacrificed = Old share - New share

Sacrificing ratio = Ratio of share sacrificed by the old partners

Share of the new partner is the sum of shares sacrificed by the old partners.

Tutorial note: When the new profit sharing ratio is not given in the problem, it is to be calculated based on the information given in the problem.

Calculation of sacrificing ratio and new profit sharing ratio under different situations

1. When new profit sharing ratio is given

When new profit sharing ratio is given, sacrificing ratio has to be calculated as follows:

Sacrificing ratio = Ratio of share sacrificed by the old partners

Share sacrificed = Old share - New share

Illustration 8

Anbu and Raju are partners, sharing profits in the ratio of 3:2. Akshai is admitted as a partner. The new profit sharing ratio among Anbu, Raju and Akshai is 5:3:2. Find out the sacrificing ratio.

Solution

2. When new profit sharing ratio is not given

(a) When share sacrificed is given

When new profit sharing ratio is not given, but the share sacrificed by the old partner(s) is given, new profit sharing ratio is calculated as follows:

Illustration 9

Hari and Saleem are partners sharing profits and losses in the ratio of 5:3. They admit Joel for 1/8 share, which he acquires entirely from Hari. Find out the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

Share sacrificed by old partners

Illustration 10

Ravi and Kumar share profits and losses in the ratio of 7:3. Christy is admitted as a new partner with 3/7 share which he acquires 2/7 from Ravi and 1/7 from Kumar. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

Illustration 11

Hameed and Govind are partners sharing profits and losses in the ratio of 5:3. They admit John as a partner. John acquires his share 1/5 from Hameed and 1/5 from Govind. Find out the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

(b) When proportion of share sacrificed is given

(i) When share sacrificed is given as a proportion on old partners’ share

When new profit sharing ratio is not given, but the share sacrificed is given as a proportion on old partners’ share, new profit sharing ratio is calculated as follows:

Share sacrificed by old partner = Old share x Proportion of share sacrificed

New share of old partner = Old share - Share sacrificed

Share of new partner = Sum of shares sacrificed by old partners

Illustration 12

Suresh and Dinesh are partners sharing profits in the ratio of 3:2. They admit Ramesh as a new partner. Suresh surrenders 1/5 of his share in favour of Ramesh. Dinesh surrenders 2/5 of his share in favour of Ramesh. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

Illustration 13

Prasanth and Nisha are partners sharing profits and losses in the ratio of 3:2. They admit Ramya as a new partner. Prasanth surrenders 2/5 of his share and Nisha surrenders 2/5 of her share in favour of Ramya. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

(ii) When proportion of share sacrificed on new partner’s share is given

When new profit sharing ratio is not given, but the proportion of share sacrificed on new partner’s share is given, new profit sharing ratio is calculated as follows:

New share of old partner = Old share - Share sacrificed

Share sacrificed = New partner’s share × Proportion of share sacrificed

Illustration 14

Ramesh and Raju are partners sharing profits in the ratio of 2:1. They admit Ranjan into partnership with 1/4 share of profit. Ranjan acquired the share from old partners in the ratio of 3:2. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

Illustration 15

Mahesh and Dhanush are partners sharing profits and losses in the ratio of 2:1. Arun is admitted for 1/4 share which he acquired equally from both Mahesh and Dhanush. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

(c) When share sacrificed and proportion of share sacrificed is not given 

When new profit sharing ratio, share sacrificed and the proportion of share sacrificed is not given, but only the share of new partner is given, new profit sharing ratio is calculated by assuming that the share sacrificed is the proportion of old share. New profit sharing ratio is calculated as follows:

Share sacrificed = New partner’s share x Old share

New share of old partner = Old share - Share sacrificed

Illustration 16

Vimal and Athi are partners sharing profits in the ratio of 2:1. Jeyam is admitted for 1/4 share in the profits. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio

Since share sacrificed, proportion of share sacrificed and new profit sharing ratio are not given, it is assumed that the existing partners sacrifice in their old profit sharing ratio, that is, 2:1.

Sacrificing ratio of Vimal and Athi is 2:1

Let the total share be 1

Illustration 17

Anil, Sunil and Hari are partners in a firm sharing profits in the ratio of 4:3:3. They admit Raja for 20% profit. Calculate the new profit sharing ratio and sacrificing ratio.

Solution

Computation of sacrificing ratio and new profit sharing ratio