On what occasions sacrificing ratio is used?

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Q. On what occasions sacrificing ratio is used?

Arunachal CbseNCERTSubjective· 2mImportance★★★★★

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Concept understanding — Sacrificing Ratio Definition

Let’s start with something you already know from everyday life.

Suppose you and your friend share a pizza equally — half each. One day, your friend says, “I’m not that hungry, you can have a bigger slice today.” So you take 60% and your friend takes 40%. Your friend has sacrificed 10% of the pizza in your favour. That 10% is the sacrificing ratio — the share your friend gave up so you could have more.

Now bring this into a partnership firm. Partners share profits in a fixed ratio (say 3:2). When a new partner is admitted, the old partners have to give up a part of their share to make room for the newcomer. The proportion in which they give up their shares is called the sacrificing ratio.

Precise meaning

Important

Sacrificing ratio = Old ratio – New ratio (for each old partner).

If the result is positive, that partner has sacrificed. If negative, that partner has gained (which is called the gaining ratio, used at retirement).

For example, if A and B share profits 3:2, and they admit C for a 1/5th share, the new ratio might become 2:2:1. Then:

A’s sacrifice = 3/5 – 2/5 = 1/5
B’s sacrifice = 2/5 – 2/5 = 0

So A alone sacrifices 1/5th of the total profit. That 1/5th is the sacrificing ratio between A and B — here it’s simply 1:0.

Why does it matter?

Because the new partner brings in goodwill (a premium) to compensate the old partners for the share they gave up. That goodwill is distributed among the sacrificing partners in their sacrificing ratio. If you don’t calculate the sacrificing ratio correctly, you’ll distribute the goodwill unfairly — and that’s a serious accounting error.

Accounting treatment

When the new partner brings in his share of goodwill in cash:

Journal entry:
- Debit: Cash/Bank A/c (with the amount brought in)
- Credit: Premium for Goodwill A/c (with the same amount)
Then the premium is distributed to the sacrificing partners:
- Debit: Premium for Goodwill A/c
- Credit: Old Partners’ Capital A/cs (individually, in sacrificing ratio)

If the new partner does not bring in cash, the adjustment is done through the capital accounts directly (the new partner’s capital is debited, and the old partners’ capitals are credited).

Format: Capital Accounts (showing goodwill adjustment) …

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Sacrificing ratio is used to determine the share of profit or loss that a partner gives up in favour of another partner(s) at the time of admission, retirement, death, or change in profit-sharing ratio.

Concept and Accounting Treatment

Sacrificing ratio is the ratio in which the old partners agree to sacrifice their share of profit in favour of a new partner. It is calculated as:

Sacrificing Ratio = Old Ratio – New Ratio

The accounting treatment for sacrificing ratio is crucial because it determines how the new partner compensates the old partners for the share of profit they give up. This compensation is typically in the form of goodwill brought in by the new partner.

Why is sacrificing ratio used?

Admission of a new partner: When a new partner is admitted, they acquire their share of profit from the existing partners. The old partners sacrifice a portion of their profit share in favour of the new partner. The new partner brings in goodwill to compensate the old partners for this sacrifice.
Change in profit-sharing ratio: When existing partners decide to change their profit-sharing ratio, some partners may sacrifice a portion of their share while others gain. The sacrificing ratio is used to adjust goodwill or other assets/liabilities.
Retirement or death of a partner: When a partner retires or dies, the remaining partners may acquire the retiring partner's share. The gaining ratio (which is the reverse of sacrificing ratio) is used to adjust goodwill.

Key accounting rule: The partner(s) who sacrifice their share are credited with the goodwill amount in their sacrificing ratio, while the gaining partner(s) are debited.

Watch out

A common mistake is confusing sacrificing ratio with gaining ratio. Remember: sacrificing ratio is used when a partner gives up their share (e.g., at admission), while gaining ratio is used when a partner acquires additional share (e.g., at retirement).

Solution: Journal Entry for Goodwill Adjustment

Let's take a standard example to illustrate the use of sacrificing ratio:

Example: A and B are partners sharing profits in the ratio of 3:2. They admit C as a new partner for 1/5th share. C brings ₹50,000 as goodwill. The new profit-sharing ratio is 3:1:1.

Step 1: Calculate Sacrificing Ratio

Partner	Old Ratio	New Ratio	Sacrifice/Gain
A	3/5	3/5	0
B	2/5	1/5	1/5 (Sacrifice)

Working Note 1: Sacrificing Ratio Calculation

A's sacrifice = 3/5 - 3/5 = 0
B's sacrifice = 2/5 - 1/5 = 1/5
Sacrificing Ratio = 0:1/5 = 0:1 (only B sacrifices)

Step 2: Journal Entry for Goodwill

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	50,000
To Goodwill A/c		50,000
(Being goodwill brought in by C)
Goodwill A/c Dr.	50,000
To B's Capital A/c		50,000
(Being goodwill credited to B in sacrificing ratio)

Working Note 2: Goodwill Distribution

Total goodwill brought in = ₹50,000
B's share = ₹50,000 × 1/1 = ₹50,000
A's share = ₹50,000 × 0 = ₹0

Tip

When only one partner sacrifices, the entire goodwill brought in by the new partner goes to that sacrificing partner. No entry is needed for the non-sacrificing partner.

Other Occasions Where Sacrificing Ratio is Used

1. Revaluation of Assets and Liabilities

When a new partner is admitted, assets and liabilities are revalued. The profit or loss on revaluation is distributed among old partners in their old profit-sharing ratio (not sacrificing ratio). However, if the revaluation is done at the time of a change in profit-sharing ratio, the profit/loss is distributed in the sacrificing ratio.

2. Accumulated Profits and Reserves …

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Q.On what occasions sacrificing ratio is used?

Concept and Accounting Treatment

Solution: Journal Entry for Goodwill Adjustment

Step 1: Calculate Sacrificing Ratio

Step 2: Journal Entry for Goodwill

Other Occasions Where Sacrificing Ratio is Used

1. Revaluation of Assets and Liabilities

2. Accumulated Profits and Reserves …

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