Difference Between Sacrificing Ratio and Gaining Ratio

Difference Between Sacrificing Ratio and Gaining Ratio

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Rashmi
Rashmi Karan
Manager - Content
Updated on Sep 15, 2023 16:26 IST

Uncover the key differences between sacrificing ratio and gaining ratio in business partnerships. Learn how these ratios determine the share of profits and capital among existing and new partners with an organization.

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Sacrificing and gaining ratios are key components in partnership accounting and are crucial in determining profit-sharing and redistributing ownership interests. By establishing clear rules for profit-sharing and ownership redistribution, these ratios create a sense of trust among partners and encourage them to work collaboratively towards the company’s profitability. In this blog we will cover the difference between sacrificing ratio and gaining ratio.

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Tabular Comparison – Sacrificing Ratio vs Gaining Ratio

Main Difference – The sacrificing ratio determines the ratio in which the existing partners give up their share of profits/losses in favor of the new partner, while the gaining ratio determines the ratio in which the existing partners receive the share of profits/losses when a partner leaves the business.

Feature Sacrificing Ratio Gaining Ratio
Definition Determines the ratio in which existing partners give up (Sacrifice) their share of profits/losses in favor of the new partner. Determines the ratio in which the existing partners receive (Gain) the share of profits/losses from the outgoing partner.
Occurrence When a new partner enters the partnership. When a partner leaves the partnership.
Calculation The sacrificing ratio is calculated by comparing the sacrificing partner’s share before and after the entry of the new partner. The gaining ratio is calculated by comparing the gaining partner’s share before and after an existing partner leaves the organization. 
Impact on Profits The sacrificing ratio affects the division of profits between existing and new partners. The gaining ratio affects the division of profits between the existing partners and the outgoing partner.
Allocation of Losses The sacrificing ratio determines the distribution of losses between the existing partners and the new partner. The gaining ratio determines the distribution of losses between the existing partners and the outgoing partner.
Change in Ownership The sacrificing ratio does not affect the existing partners’ ownership in the partnership. The gaining ratio reflects the change in the ownership interest of the existing partners after the departure of a partner.
Future Profit Sharing The sacrificing ratio does not affect the future profit-sharing ratio among the existing partners. The gaining ratio may lead to a change in the future profit-sharing ratio among the remaining partners.

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What is Sacrificing Ratio?

The sacrificing ratio refers to the proportion in which the existing partners sacrifice their share of profits in favor of a new partner who enters the partnership.

Sacrificing Ratio Formula

The sacrificing ratio is the difference between the old ratio (the profit-sharing ratio before the new partner was admitted) and the new ratio (the profit-sharing ratio after the new partner was admitted).

Sacrificing Ratio = Old Profit Sharing RatioNew Profit Sharing Ratio

For example, if there are two existing partners, A and B, sharing profits in the ratio of 5:2, and a new partner C is admitted with a profit-sharing ratio of 4:2:1 (A:B:C).

In the given scenario, the sacrificing ratio of A and B would be calculated as follows:

  • For A: Old ratio – New ratio = 5/7 – 4/7 = 1/7
  • For B: Old ratio – New ratio = 2/7 – 2/7 = 0

So, the sacrificing ratio of A and B is 1:0, which means that partner A is sacrificing 1/7th of his share of profits in favor of the new partner C, while partner B is not sacrificing any of his shares.

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Why is the Sacrificing Ratio Important?

When a new partner is admitted into the partnership, the new partner usually brings some capital and goodwill to the business. In return, the new partner is given a share in the business’s future profits. The existing partners usually give This share of profits, which means they have to sacrifice a part of their profits.

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What is Gaining Ratio?

The gaining ratio refers to the ratio in which the remaining partners of a company share the profits and losses after a partner retires, resigns, or leaves the partnership. This ratio determines the redistribution of the outgoing partner’s share among the remaining partners. 

Gaining Ratio Formula

The gaining ratio is calculated by comparing the partners’ new profit-sharing ratios after their exit to their previous profit-sharing ratios.

Gaining Ratio = New Profit Sharing Ratio – Old Profit Sharing Ratio

Let us understand this concept better with a use case for the gaining ratio:

Consider a partnership business with three partners: A, B, and C. They share profits and losses in the ratio of 5:3:2, respectively.

Now, Partner C has decided to retire from the business. As a result, the profit-sharing ratio between A and B needs to be re-evaluated. After negotiation, they decide to share future profits in the ratio of 3:2 (A:B).

The gaining ratio is the difference between the new ratio and the old ratio for each partner:

  • For A: New ratio – Old ratio = 3/5 – 5/10 = 1/10
  • For B: New ratio – Old ratio = 2/5 – 3/10 = 1/10

So, the A and B gaining ratio is 1:1, which means that both partners A and B are gaining an equal share of C’s previous share of profits due to C’s retirement.

Why is Gaining Ratio Important?

At the time of the departure of a partner, the gaining ratio helps determine how the outgoing partner’s share of profits/losses will be distributed among the remaining partners. 

The gaining ratio reflects the ownership interest or profit-sharing arrangement change among the remaining partners.

The gaining ratio has implications for the division of future profits, as it may lead to a change in the profit-sharing ratio among the remaining partners. It also affects losses and their distribution.

Concluding Remark

Please note that both sacrificing and gaining ratios are specific to partnership accounting. It ensures a fair and equitable distribution of profits and losses among the partners. The calculation of both ratios may vary based on the specific circumstances and terms outlined in the partnership agreement.

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FAQs

What is the purpose of the sacrificing ratio?

The sacrificing ratio helps determine the extent to which existing partners are willing to give up their profits and/or capital to accommodate a new partner into the partnership.

What is the purpose of the gaining ratio?

The gaining ratio helps determine the proportion in which profits and losses are to be shared between the existing and new partners after their admission to the partnership.

How does the sacrificing ratio affect the distribution of profits among partners?

The sacrificing ratio determines the share of profits each partner will receive after admitting a new partner. A higher sacrificing ratio means a partner will receive a smaller share of profits.

How does the gaining ratio affect the distribution of profits among partners?

The gaining ratio determines the share of profits the new partner will receive. It also determines the change in the share of profits for the existing partners. A higher gaining ratio means a partner will receive a larger share of profits.

Are sacrificing ratio and gaining ratio always the same?

No, sacrificing ratio and gaining ratio are not always the same. The existing partners determine the sacrificing ratio, while the existing and new partners collectively determine the gaining ratio.

Can sacrificing ratio and gaining ratio change over time?

Yes, sacrificing ratio and gaining ratio can change over time. They are typically revised when there are changes in the partnership agreement, such as the admission of new partners or the retirement of existing partners.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio