2. New profit sharing ratio, Sacrificing Ratio

Determination of New Profit Sharing Ratio

The new or incoming partner is entitled to the share of future profits & losses of the firm. Therefore, there will be a change in the existing profit sharing ratio of the old partners since the new partner will acquire his/her share from the existing share of old partners. The new or incoming partners may acquire the share from the old partner in the following ways;

1. In their old profit-sharing ratio
2. In a particular ratio or surrendered ratio
3. In a particular fraction from some of the partners

Let us discuss in detail;

1. When a new partner acquires his share from old or existing partners in their old profit sharing ratio;

In this situation, the share of the new partner is given & it is assumed that the new partner has acquired his share from old partners in their old profit sharing ratio. Old partners continue to share the balance profits & losses in their old profit-sharing ratio. Unless otherwise agreed, the profit-sharing ratio of the existing partners remains unchanged & the new profit sharing ratio is determined by deducting new or incoming partner’s share from 1 & then dividing the balance in old profit sharing ratio of the old partners.

2. When share of the New partner is given & new ratio of Old Partners is also given;

In this case, the new partner’s share is deducted from 1 & the balance is divided among old partners in their new ratio. Hence, there is a new profit-sharing ratio for all the partners.

3. When New or Incoming Partner acquires his share from old or existing partners in a particular ratio;

In such a case, the new or incoming partner acquires a part of share of profits from one partner & a part of share of profits from another partner. The existing partner’s share will change to the extent of share sacrificed on admission of new partner.

4. When new or incoming partner acquires his shares by surrender of particular fraction of their shares by the old or existing partners;

In such a case, the shares surrendered by the old partners in favor of the new partners are added & it becomes the share of the new partner. The shares surrendered by the old partners is deducted from their respective share to determine old partner’s share in the reconstituted firm. 

The Concept of Sacrificing Ratio

Sacrificing ratio can be explained as the ratio in which existing or old partners sacrifice their share of profits in favor of the new or incoming partner. It can also be defined as the ratio in which the new partner is given a share by the existing partners. This share can be given by all the partners equally or by some of the partners in agreed share. Sacrificing ratio determines the compensation that new partner should pay to the old partners for the share of profits sacrificed by them. The following can be the situations under which sacrificing ratio is determined;

1. When the share of new or incoming partner is given without giving the details of the sacrifice made by the old or existing partners

In this situation, there is no change in the profit sharing ratio of old partners because it is assumed that the partners make sacrifices in their old profit sharing ratio & for that reason sacrificing ratio is always in the old profit sharing ratio.

2. When the old ratio of old or existing partners & new ratio of all the partners are given

In this case, the sacrificing ratio is the difference between the old ratio & the new ratio.

3. When new or incoming partner acquires the share by surrendering a particular fraction of shares by old partners

In such a case, the shares surrendered by the old partner in favor of the new partner are added & it becomes the share of the incoming or new partner. The shares so surrendered by the old partner is deducted from his old share to find out his share in the reconstituted firm.