Calculation of New Profit Sharing Ratio in terms of Retirement of a Partner
When somebody left the firm, his share which left to the firm is gain to remaining partners. On the death or retirement of a partner, the partnership firm will be reconstituted. After the retirement of someone, if the new profit sharing ratio is not given, then it has to be understood that they will continue the old ratio. One major change will be the change in the profit-sharing ratios of the remaining partners. The new profit sharing ratio of the remaining partners is determined in the following way:
Suppose, three partners A, B and C are sharing profits and losses in the ratio of 2:3:1, as there is no fresh or new agreement between A and B, the new profit sharing ratio between A and B will be 2:3 by eliminating the share of C.
In the above calculation, gaining ratio of A and B will be:
A= 2/5-2/6 = 1/15
B = 3/5-3/6 = 1/10
Thus, gaining ratio is calculated by deducting old ratio from new ratio i.e.
The ratio in which the partners decide to share profits/losses in the future. The ratio in which the partners have agreed to sacrifice their share of profit in favor of other partners. Sacrificing ratio = Old Ratio – New Ratio.
The ratio in which the partners have agreed to gain their share of profit from other partners. Gaining ratio = New profit sharing ratio – Old profit sharing ratio.
The profit shares of all the old partners will be reduced if all of them make a sacrifice. In the case of a new ratio between the remaining partners are given, the gaining ratio calculation will be the same. However, it should not be confused with the sacrificing ratio which is calculated at the time of admission of a new partner and change in profit sharing ratio. The sacrificing ratio is calculated by deducting the new ratio from the old one. What the old partners sacrifice, is in favor of the new partner. On the other hand, gaining ratio is computed by subtracting the old ratio from a new one. The ratio at which the profits should be divided among the old partners and the new partners is called the New Profit Sharing Ratio.