New Profit Sharing Ratio

The profit-sharing ratio is the proportion in which partners of a partnership firm divide the profits earned from business operations. When a new partner joins, an existing partner retires, or responsibilities change, the ratio must be revised this revised ratio is called the new profit-sharing ratio.

Formula

$$\mathrm{New\:Ratio = Old\:Ratio - Sacrificing\:Ratio}$$

$$\mathrm{Sacrificing\:Ratio = Old\:Ratio - New\:Ratio}$$

For retirement or death of a partner

$$\mathrm{New\:Ratio = Old\:Ratio + Gaining\:Ratio}$$

$$\mathrm{Gaining\:Ratio = \frac{Retired\:Partner's\:Share \times Individual\:Acquisition\:Ratio}{Total\:Acquisition\:Ratio}}$$

Example Calculation

Case 1: New Partner Joins

A, B, and C are partners sharing profits in 3:2:1. D joins with 1/6 share, acquired equally from all partners ?

$$\mathrm{D's\:share = \frac{1}{6}}$$

$$\mathrm{Each\:partner\:sacrifices = \frac{1}{6} \times \frac{1}{3} = \frac{1}{18}}$$

$$\mathrm{A's\:new\:share = \frac{3}{6} - \frac{1}{18} = \frac{9-1}{18} = \frac{8}{18}}$$

$$\mathrm{B's\:new\:share = \frac{2}{6} - \frac{1}{18} = \frac{6-1}{18} = \frac{5}{18}}$$

$$\mathrm{C's\:new\:share = \frac{1}{6} - \frac{1}{18} = \frac{3-1}{18} = \frac{2}{18}}$$

$$\mathrm{D's\:share = \frac{3}{18}}$$

New Profit-Sharing Ratio = 8 : 5 : 2 : 3

Case 2: Partner Retires

X, Y, Z share profits in 5:3:2. Z retires and his share is acquired by X and Y equally ?

$$\mathrm{Z's\:share = \frac{2}{10},\:each\:gains = \frac{2}{10} \times \frac{1}{2} = \frac{1}{10}}$$

$$\mathrm{X's\:new\:share = \frac{5}{10} + \frac{1}{10} = \frac{6}{10}}$$

$$\mathrm{Y's\:new\:share = \frac{3}{10} + \frac{1}{10} = \frac{4}{10}}$$

New Profit-Sharing Ratio = 6 : 4 or 3 : 2

When is a New Ratio Required?

• Admission of a new partner The most common reason. Existing partners sacrifice a portion of their share.
• Retirement of a partner The retiring partner's share is distributed among continuing partners.
• Death of a partner Similar to retirement; remaining partners gain the deceased partner's share.
• Change in responsibilities Existing partners may revise the ratio when duties or contributions change.

Scenarios in Calculating New Ratio

Factors Affecting Profit-Sharing Ratio

• Capital Contribution Partners who invest more capital typically receive a higher share. If A contributes ?50 lakh and B contributes ?70 lakh, their ratio is 5:7.
• Responsibility Shared A partner actively managing operations may get a higher share than a sleeping partner. For example, ratio may be 6:4.
• Mixed Factor Both capital and responsibility are considered together. A partner investing ?20 lakh but managing operations may get a comparable share to one investing ?50 lakh but not managing (ratio 4:5).

Conclusion

The new profit-sharing ratio is calculated whenever there is a change in the partnership structure admission, retirement, or death of a partner. The key is identifying who sacrifices or gains and by how much. Always check the partnership deed for the agreed method of calculation.

FAQs

Q1. What is the profit-sharing ratio?

It is the ratio in which partners of a firm divide the profits earned from business operations. It is usually defined in the partnership deed.

Q2. What is the new profit-sharing ratio?

When a new partner joins or an existing partner retires/dies, the old ratio is revised to accommodate the change. This revised ratio is called the new profit-sharing ratio.

Q3. What factors determine the profit-sharing ratio?

The two main factors are capital contribution and sharing of responsibilities. A combination of both (mixed factor) is also common in practice.