Sacrificing Ratio vs Gaining Ratio: Difference and Comparison

Key Takeaways

1. Sacrificing ratio refers to the change in the profit-sharing ratio among the existing partners when a new partner is added to the business.
2. The gaining ratio is the change in the existing partners when the partnership firm is reconstituted.
3. 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

1. 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.
2. 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.
3. The sacrificing ratio involves partners giving up a portion of their profits, while the gaining ratio involves partners benefitting from the redistribution of profits.
4. The sacrificing ratio reduces the profits of partners sacrificing their share, while the gaining ratio increases the earnings of partners gaining a larger share.
5. 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

References

1. https://www.nber.org/system/files/chapters/c8332/c8332.pdf
2. https://pdfs.semanticscholar.org/1c48/df444be351a6c0102a7aeee76922203e7518.pdf