Q.On what occasions sacrificing ratio is used?
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Start your 14-day free trial to unlock the full solution →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?
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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.
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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.
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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.
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
| Date | Particulars | L.F. | 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
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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