Sacrificing Ratio & Gaining Ratio

SACRIFICING RATIO

When there is a change in the profit sharing ratio due to any of the reason, one or more of the existing partners have to surrender some of their old share in favour of one or more of other partners. That surrender of profit in ratio is called sacrificing ratio. It is calculated as below:

Sacrificing Ratio = Old Ratio – New Ratio

The main purpose of calculating this is to determine the amount of compensation to be paid by the Gaining partner to the sacrificing partner (usually paid on the basis of proportionate amount of Goodwill).

GAINING RATIO

When profit sharing ratio changes between the partners, then one or more existing partners gain some portion of other partners’ share of profit. This ratio of gain of profit is known as gaining ratio. It can be calculated as follows:

Gaining Ratio = New Ratio – Old Ratio

Example:  A and B were partners in a firm sharing profits in the ratio of 5:3. With effect from 1^st April, 2012 they agreed to share profits equally. Calculate the individual partner’s gain or sacrifice due to change in ratio.

Solution:

Old Ratio of A and B = 5 : 3

New Ratio of A and B = 1: 1

Sacrifice or Gain:

A = 5 / 8 – 1 / 2 = 10 – 8 / 16 = 2 / 16 = 1 / 8 (Sacrifice)

B = 3 / 8 – 1 / 2 = 6 – 8 / 16 = 2 /16 = 1 / 8 (Gain)

A has sacrificed 1 / 8^th share whereas B has gained 1 / 8^th share.