Difference Between Sacrificing Ratio and Gaining Ratio

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.

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.

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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 Ratio – New 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.

Related Read – Financial Ratios Cheat Sheet: A Complete Guide to All Ratios

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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