Q.What is sacrificing ratio? Why is it calculated?

Sacrificing Ratio: Definition and Purpose

The sacrificing ratio is the ratio in which the existing partners agree to sacrifice (give up) their share of profits in favour of a new partner or an existing partner who is acquiring an additional share.

It is calculated by comparing each partner's old profit-sharing ratio with their new profit-sharing ratio. The formula is:

Sacrificing Ratio = Old Ratio - New Ratio

A partner sacrifices when the old share is greater than the new share; the difference represents the portion surrendered.

Why is it calculated?

The sacrificing ratio is calculated for two main reasons:

1. Compensation for goodwill: When a new partner is admitted or an existing partner's share increases, the incoming/gaining partner must compensate the sacrificing partners for the loss of their future profit share. Goodwill brought in by the new partner (or paid by the gaining partner) is distributed among the sacrificing partners in their sacrificing ratio, not the old profit-sharing ratio. …

The Concept: Why Sacrificing Ratio Exists

When a partnership admits a new partner or when existing partners change their profit-sharing arrangement, someone gains and someone loses. The partner who surrenders a portion of his future profit share is making a real economic sacrifice — he will earn less from every rupee of profit the firm generates going forward. The partner who receives that share gains a valuable right to future income.

Goodwill represents the firm's earning power above normal returns, built through the efforts and reputation of the existing partners. If a new partner walks in and immediately starts sharing that goodwill without paying for it, the sacrificing partners lose out. Fairness demands that the gaining partner compensate the sacrificing partners in proportion to what each has given up. That proportion is the Sacrificing Ratio.

Definition and Formula

Sacrificing Ratio is the ratio in which the existing partners agree to sacrifice (give up) their share of profits in favour of a new partner or a continuing partner.

For each partner:

Sacrifice = Old Share - New Share

The sacrificing ratio is then the ratio of these individual sacrifices.

If the result is positive, the partner has sacrificed; if negative, the partner has gained.

When and Why It Is Calculated

The sacrificing ratio is calculated in two principal situations:

1. Admission of a New Partner

When a new partner joins, the existing partners must carve out a share for him from their own shares. Suppose A and B share profits equally (1:1) and admit C for a 1/4 share. A and B now share the remaining 3/4 in some agreed manner — say equally again, giving them each 3/8. A has sacrificed 1/2 − 3/8 = 1/8, and so has B. Their sacrificing ratio is 1:1. C must compensate them for this sacrifice, usually by bringing in his share of goodwill, which is then distributed to A and B in the sacrificing ratio 1:1.

2. Change in Profit-Sharing Ratio Among Existing Partners

Even without a new partner, existing partners may decide to alter their profit shares — perhaps one partner is reducing his involvement, or another is taking on more responsibility. The partner whose share increases is the gainer; those whose shares decrease are sacrificing. The gainer compensates the sacrificing partners by paying for goodwill in the sacrificing ratio.

The Accounting Treatment

Once the sacrificing ratio is determined, the gaining partner's share of goodwill (either brought in cash or raised through revaluation) is transferred to the capital accounts of the sacrificing partners in that ratio.

Journal Entry (when new partner brings premium/goodwill in cash):

Then, the premium is distributed:

If goodwill is not brought in cash but is raised and written off, the entry debits all partners' capital accounts in the new ratio and credits them in the old ratio, which effectively transfers value in the sacrificing ratio. …