Accountancy · Ch 2 — Reconstitution of a Partnership Firm — Admission of a Partner
Sacrificing Ratio
Sacrificing Ratio
What is Sacrificing Ratio?
When a new partner is admitted, the existing partners give up a portion of their future profits in favour of the newcomer. The ratio in which the old partners agree to sacrifice their share of profit is called the sacrificing ratio. This ratio is crucial because the new partner compensates the old partners for this loss of share — typically by bringing in a premium for goodwill — and that compensation is distributed among the old partners in the sacrificing ratio.
The sacrifice made by a partner is calculated as:
Sacrifice = Old Share of Profit – New Share of Profit
If the result is positive, the partner has sacrificed. If it is negative, the partner has gained (which is unusual at the time of admission, but possible if the new profit-sharing ratio is given directly).
How is the Sacrificing Ratio Determined?
The sacrificing ratio may be explicitly agreed upon by the partners. It could be:
- Their old profit-sharing ratio,
- An equal sacrifice, or
- Any other specified ratio.
However, when the problem does not state the sacrificing ratio directly but instead gives the new profit-sharing ratio, you must calculate the sacrifice by subtracting each partner’s new share from their old share.
A common mistake is to assume the sacrificing ratio is the same as the old ratio. Always check whether the new ratio is given — if it is, you must compute the sacrifice individually.
Step-by-Step Method to Calculate Sacrificing Ratio
- Find each old partner’s old share from the given old ratio.
- Find each old partner’s new share from the given new ratio (including the new partner).
- Subtract the new share from the old share for each old partner.
- Express the sacrifices as a ratio (simplify if needed).
When a partner gains instead of sacrificing, that gain is usually adjusted through a journal entry (often involving the gaining partner compensating the sacrificing partner privately or through the firm’s books). The concept of gaining ratio becomes relevant in retirement or death, but at the time of admission, the focus is on the sacrificing ratio for distributing goodwill brought in by the new partner.
Accounting Treatment of Goodwill Based on Sacrificing Ratio
The new partner brings in a premium for goodwill to compensate the old partners for their sacrifice. This amount is shared by the existing partners in the sacrificing ratio. The journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c | Dr. | xxx | ||
| To Premium for Goodwill A/c | xxx | |||
| (Being the amount brought in by the new partner as his share of goodwill) |
Then, the premium is distributed to the old partners:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Premium for Goodwill A/c | Dr. | xxx | ||
| To Old Partner 1’s Capital A/c | xxx | |||
| To Old Partner 2’s Capital A/c | xxx | |||
| (Being the goodwill premium credited to old partners in their sacrificing ratio) |
The sacrificing ratio is the only basis for distributing the goodwill premium brought by the new partner. Never use the old profit-sharing ratio or the new ratio for this purpose unless they happen to be the same as the sacrificing ratio. …