Sacrificing Ratio in Admission of a New Partner

Sacrificing ratio is a term used in accounting when a new partner is admitted into a partnership firm. It is the ratio in which the old partners agree to bear the losses or reduce their share of profits to accommodate the new partner. The sacrificing ratio is calculated by subtracting the new profit sharing ratio from the old profit sharing ratio.

Distribution of Goodwill

Goodwill is an intangible asset that represents the reputation and brand image of a business. When a new partner is admitted into a partnership firm, the firm's goodwill increases. The new partner is entitled to a share of the goodwill, and the old partners must sacrifice a portion of their share to accommodate the new partner. The sacrificing ratio is used to determine the distribution of goodwill among the partners.

Example

Suppose a partnership firm has three partners, A, B, and C. Their profit sharing ratio is 4:3:2. They decide to admit a new partner, D, with a profit sharing ratio of 1:4. The sacrificing ratio would be (4+3+2):(1+4) = 9:5. This means that for every 9 units of profit earned, the old partners will share 4 units, and the new partner will share 5 units. If the firm's goodwill is valued at Rs. 1,00,000, the distribution of goodwill would be as follows:

- A's share = (4/9) x Rs. 1,00,000 = Rs. 44,444
- B's share = (3/9) x Rs. 1,00,000 = Rs. 33,333
- C's share = (2/9) x Rs. 1,00,000 = Rs. 22,222
- D's share = (5/9) x Rs. 1,00,000 = Rs. 55,555

Conclusion

The sacrificing ratio is used to distribute the goodwill among the partners when a new partner is admitted into a partnership firm. It represents the ratio in which the old partners agree to sacrifice a portion of their share of profits to accommodate the new partner. The distribution of goodwill is based on the sacrificing ratio and the value of the firm's goodwill.