Key Takeaways
- Sacrificing ratio refers to the change in the profit-sharing ratio among the existing partners when a new partner is added to the business.
- The gaining ratio is the change in the existing partners when the partnership firm is reconstituted.
- The sacrificing ratio reduces the profits of partners sacrificing their share, while the gaining ratio increases the earnings of partners gaining a larger share.
What is Sacrificing Ratio?
In the context of a partnership firm, the sacrificing ratio refers to the change in the profit-sharing ratio among the existing partners when a new partner is admitted to the business or when a current partner decides to leave the firm.
When a new partner is introduced or an existing partner exits, the current partners may have to sacrifice a portion of their profits to accommodate the new partner or compensate the departing partner. The sacrificing ratio is the ratio in which the existing partners agree to redistribute their shares of profits.
Calculating the sacrificing ratio involves determining how much each existing partner will give up and in what proportion. This adjustment is based on mutual agreement among the partners per the terms specified in the partnership need.
What is Gaining Ratio?
The gaining ratio is the change in the profit-sharing ratio among the existing partners when there is a reconstitution of the partnership firm due to various reasons, such as the retirement or death of a partner. The gaining ratio reflects how much each existing partner’s share of profits will increase due to the changes.
The gaining ratio determines the new distribution of profits among the existing partners. It is calculated by subtracting the old profit-sharing ratio from the new one. It is essential to ensure that the departing partner’s share of profit is appropriately redistributed among the remaining partners in accordance with the terms of the partnership deed or mutual agreement.
The gaining ratio ensures that the partners who remain in the business receive a fair distribution of profits after the departure of a partner.
Difference Between Sacrificing Ratio and Gaining Ratio
- The sacrificing ratio refers to the ratio in which the existing partners give up their share of profits to accommodate a new partner or to redistribute profits among themselves. In contrast, the gaining ratio represents the increase in profits for existing partners when a new partner is admitted to a change in profit-sharing.
- Sacrificing ratio is calculated by comparing the old ratio of the partners with the new ratio after changes in partnership. In contrast, the gaining ratio is calculated by subtracting the old ratio from the new ratio of the partners.
- The sacrificing ratio involves partners giving up a portion of their profits, while the gaining ratio involves partners benefitting from the redistribution of profits.
- The sacrificing ratio reduces the profits of partners sacrificing their share, while the gaining ratio increases the earnings of partners gaining a larger share.
- Sacrificing ratio involves settling outstanding dues, liabilities, and other financial matters when a partner exits, while gaining ratio requires a formal agreement or amendment to the partnership deed when a new partner is admitted.
Comparison Between Sacrificing Ratio and Gaining Ratio
| parameters | Sacrificing Ratio | Gaining Ratio |
|---|---|---|
| Definition | Existing partners give up their share of profits | Increase in the share of profit for existing partners |
| Calculation | Comparing old ratio | Subtracting the old ratio from the new ratio |
| Partner’s role | Giving up a portion | Benefitted from the redistribution of profits |
| Impact | Reduces the profit of partners | Increases the profit of partners |
| Legal implications | Settling dues, liabilities and other financial matters | A formal agreement or amendment |
- https://www.nber.org/system/files/chapters/c8332/c8332.pdf
- https://pdfs.semanticscholar.org/1c48/df444be351a6c0102a7aeee76922203e7518.pdf
Last Updated : 03 March, 2024
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
The in-depth explanation of the sacrificing and gaining ratio is greatly beneficial. The clarity of the differences and implications between the two is commendable. A great reference for anyone involved in partnership firms.
This article is overly complex and verbose. It could benefit from a more straightforward approach to deliver the same information effectively.
This article provides a comprehensive and clear understanding of concepts related to the partnership firm’s profit-sharing ratios. The explanations are precise and helpful for professionals and students pursuing further education or looking to apply for partnership firms.
Agreed. It’s a useful article for businesses thinking of changing the partnership structure.
The article is enlightening and efficiently covers the distinctions between sacrificing and gaining ratio. As someone not well-versed in the subject matter, I found the language accessible and informational.
While the article provides an extensive explanation of the sacrificing and gaining ratio, I would have appreciated a more practical example to reinforce the understanding of the concept.
I understand where you are coming from. A practical example would indeed be helpful for better comprehension.
This is an interesting take on the difference between sacrificing and gaining ratio. I appreciate the detailed comparison and how it specifies the impact and legal implications of each.