Sacrificing Ratio is the ratio in which old or existing partners forego, i.e., sacrifice their share of profit in favor of the new or incoming partner. This share may be given or sacrificed to the new or incoming partner by all the old partners equally or by all or some of the partners in agreed ratio.
WHY SACRIFICING RATIO IS CALCULATED?
The purpose of calculating the sacrificing ratio is to determine the amount of compensation which the new partners should pay to the old partners for the share of profit sacrificed by them. The compensation is usually paid in the terms of Goodwill.
SACRIFICING RATIO= OLD SHARE- NEW SHARE
HOW IS SACRIFICING RATIO CALCULATED?
It is calculated differently in three different situations. These are as follows:
SITUATION 1: When share of new or incoming partner is given without giving the details of sacrifice made by old or existing partners.
In this situation, it is assumed that the old partners forego their share in old profit sharing ratio. Therefore, sacrificing ratio is always the old profit sharing ratio. Thus the effect will be that there will be no change in the profit sharing ratio of the old partners.
EXAMPLE: A and B are partners sharing profits in the ratio of 3:1. C is admitted into partnership for 1/8th share of profits. Calculate sacrificing ratio.
SOLUTION: Since C’s share is given without mentioning as to what C acquires from A and B separately, C acquires his share from A and B in their old profit sharing ratio. Therefore, the sacrifice made by A and B is in the ratio of 3:1.
A’s sacrifice = 1/8 * 3/4= 3/32
B’s sacrifice = 1/8 * 1/4= 1/32
So, Sacrificing ratio is similar to Old ratio, i.e. 3:1
SITUATION 2: When old ratio of old partners and new ratio of all the partners is given.
In this situation, sacrifice of share of each sacrificing partner is calculated by deducting the new share from old share.
EXAMPLE: A and B are partners sharing profits I n the ratio of 3:2. C is admitted into partnership. New profit sharing among A, B and C is 5:3:2. Find sacrificing ratio.
SOLUTION: Sacrificing Ratio = Old share- New share
A’s Sacrifice= 3/5-5/10=1/10
B’s sacrifice= 2/5-3/10=1/10
Hence, sacrificing ratio of A and B= 1:1
SITUATION 3: When new or incoming partner acquires the share by surrender of a particular fraction of shares by old partners.
In this situation, share surrendered by each old partner is deducted from his old share to determine his share in the reconstituted firm. The shares surrendered by the old partners in favour of new or incoming partner are added. It is the share of the new partner.
EXAMPLE: A and B are partners in a firm sharing profits and losses in the ratio of 5:3. A surrenders 1/20th of his share, whereas B surrenders 1/24th of his share in favour of C, a new partner. Calculate sacrifice of partners.
SOLUTION: A’s Sacrifice= 5/8*1/20= 1/32 or 2/64
B’s Sacrifice= 3/8 * 1/24= 3/64
So, the sacrifice is 2:1
DIFFERENCE BETWEEN SACRIFICING RATIO AND NEW RATIO
|BASIS OF DIFFERENCE
|It is the ratio in which old partners agree to sacrifice their shares of profits in the favor of a new partner.
|It is the ratio in which all partners including the incoming partner share the future profits and losses.
|It is related to the old partners only.
|It is related to al the partners including new partner.
|Old Ratio- New Ratio
|Old Ratio-Sacrificing Ratio