Accountancy · Ch 6 — Reconstitution of a Partnership Firm — Admission of a Partner
New Profit Sharing Ratio
New Profit Sharing Ratio
When a new partner is admitted, they must be given a share of the future profits. That share cannot come from nowhere — it is given up by the existing (old) partners. This sacrifice by the old partners is the core idea behind calculating a new profit sharing ratio.
The new profit sharing ratio is simply the ratio in which all partners (old and new) will share profits after the admission. It must be calculated because the old ratio automatically changes once the new partner’s share is introduced.
How the new partner acquires their share
The textbook presents several possibilities. The key is to understand that the new partner’s share is always taken from the old partners’ shares. The exact method depends on what is agreed upon.
Case 1: Nothing is specified — If the agreement is silent on how the new partner gets their share, it is assumed that the new partner acquires it from the old partners in their old profit sharing ratio. This is the default rule.
Case 2: The new partner gets a fixed share, taken equally from each old partner — Here, the sacrifice is equal in amount, not in proportion to the old ratio.
Case 3: The new partner gets a fixed share, taken in specific amounts from each old partner — The problem will state exactly how much each old partner gives up (e.g., 2/10 from one, 1/10 from another).
Case 4: Each old partner sacrifices a fraction of their own share — The problem gives the fraction of their own share that each old partner gives up (e.g., Ram sacrifices 1/4 of his share, Shyam sacrifices 1/3 of his share).
Case 5: The new partner acquires their entire share from only one old partner — The other old partner’s share remains unchanged.
The calculation method (step-by-step)
Regardless of the case, the logic is the same:
- Determine the new partner’s share. This is usually given directly (e.g., 1/5, 3/10).
- Calculate the remaining share. This is the total profit (1) minus the new partner’s share. This remaining share is what the old partners will now divide among themselves.
- Calculate each old partner’s new share. This is done by taking their old share and subtracting whatever they have sacrificed. The sacrifice can be expressed as:
- A fraction of the remaining share (Case 1).
- A fixed amount (Cases 2, 3, 5).
- A fraction of their own old share (Case 4).
- Express all shares with a common denominator to get the final ratio.
The sacrifice made by an old partner is the difference between their old share and their new share. It is the portion they give up for the new partner.
Summary of the accounting treatment
There is no journal entry for calculating or recording the new profit sharing ratio itself. The ratio is simply a mathematical calculation that is used later for: …