New Profit Sharing Ratio, Formula, Examples
The New Profit Sharing ratio is the ratio in which all partners split earnings and losses between themselves after the joining of a new partner or the retirement of an existing partner. Continue to learn more!
Izhar Ahmad18 Sept, 2024
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New Profit Sharing Ratio: The profit sharing ratio refers to the proportion in which company partners distribute earnings and losses. When a new partner joins the business, they receive their share of profits and losses from the existing partners, essentially meaning that the existing partners allocate a portion of their earnings to the new partner.
The new ratio created is known as the new profit sharing ratio, and the ratio in which existing partners give up their profits is known as the sacrificing ratio. The business's partners agree on the share ratio.New Profit Sharing Ratio
New profit sharing ratio refers to the revised distribution arrangement among partners in a business, specifying how profits and losses will be shared among them. When the partnership undergoes changes, such as the admission of a new partner, retirement, or withdrawal of an existing partner.New Profit Sharing Ratio Terms
There are many instances in which a firm may need to implement a new profit sharing ratio .- If the partners desire to change their present profit-sharing ratio without including or excluding any members, they may do so.
- When an additional partner joins a company
- When an old partner passes away or retires
New Profit Sharing Ratio Formula
The New Profit Sharing Formula is a way to calculate how profits should be distributed among partners when there are changes in the partnership structure. The New Profit Sharing Formula is as follows: NPS = OPS + (Change in Sacrificing Ratio) + (Change in Gaining Ratio)- The "NPS" (New Profit Sharing Ratio) is the updated ratio in which partners will share profits after the changes in the partnership structure.
- "OPS" (Old Profit Sharing Ratio) represents the initial profit-sharing ratio that was in place before any changes.
- The "Change in Sacrificing Ratio" refers to how much the existing partners have altered their profit-sharing percentages, either by giving up some of their shares or receiving a smaller share.
- The "Change in Gaining Ratio" indicates how the new partner or any existing partners who are gaining more in the new arrangement have adjusted their profit-sharing percentages.
Sacrificing Ratio Vs New Profit Sharing Ratio
The Sacrificing ratio is the ratio in which the previous partners give up their profit share for the benefit of the new partner. As a result, all or some of them donate the sacrificed percentage to the new spouse. The necessity to calculate the sacrifice ratio comes when a new partner is admitted. As the name implies, it reduces current partners' profit-sharing. Unlike the sacrifice ratio, the new profit sharing ratio may be determined when a new partner is admitted or when a partner retires. When a partner leaves the company, the profit-sharing of the remaining partners rises, and when a new partner joins, the profit-sharing of the remaining partners drops.New Profit Sharing Ratio Calculation Examples
A new or arriving partner might acquire his share from the existing partners as follows:Case 1: In Their Old Profit-Sharing Ratio
Example: Suppose there is a partnership among three individuals: Rahul, Ravi, and Meera. Their old profit-sharing ratio is 3:2:1, respectively. Ankit joins the partnership, and he acquires his share based on this existing ratio. If the total profit is ₹60,000, the new profit sharing ratio remains 3:2:1:1, which includes Ankit.Case 2: In a Particular or Surrendered Ratio
Example: Let's consider the same partnership of Rahul, Ravi, and Meera. However, this time, the partners agree to a new ratio where Ravi surrenders a part of his share. If Ravi surrenders half of his share, the new ratio becomes 3:1.5:1.5. If the total profit is ₹50,000, the profit sharing would be ₹30,000 for Rahul, ₹15,000 each for Ravi and Meera.Case 3: In a Particular Fraction by Some Partners
Example: Imagine the partnership of Rahul, Ravi, and Meera again. This time, they agree that Ankit will receive half of Ravi's share. If Ravi's share is 2/5 of the total profit, and the total profit is ₹80,000, then Ankit's share would be ₹16,000 (1/2 * 2/5 * ₹80,000), and the new profit sharing ratio becomes 3:3:1.Case 4: His/Her Share Completely from One Old Partner
Example: Continuing with the same partners, if Ankit acquires his share completely from Ravi, the new ratio would be 3:1:1 (Rahul:Ankit:Meera) if the old ratio was 3:2:1 and the total profit is ₹70,000. Ankit's share would be ₹20,000, and the remaining profit would be shared between Rahul and Meera in their old ratio.Case 5: Old Partners Share in a Fixed Proportion
Example: Let’s imagine Rahul, Ravi and Meera agreed that Ankit would be awarded 20% of overall earnings and the rest 80% would be split among them according to their former ratio of 3:2:1. If overall profit was 90,000 rupees, Ankit’s portion of 20 percent of this total was 18,000 rupees. The balance, 72,000 rupees, would have been shared betweenNew Profit Sharing Ratio FAQs
What is the new profit sharing ratio?
The new profit sharing ratio is the revised distribution of profits among partners after changes in the partnership structure.
How is the sacrificing ratio calculated in a partnership?
The sacrificing ratio is calculated by finding the difference between the old ratio and the new ratio of the partners who sacrifice a portion of their share.
What factors influence the new profit sharing ratio?
Factors like investments, roles, and agreements among partners influence the new profit sharing ratio.
When does a partnership need to adjust its profit sharing ratio?
Profit sharing ratio adjustments are needed when there are changes such as admission of a new partner, retirement, or withdrawal of an existing partner.
What is the Gaining Ratio in the New Profit Sharing Ratio?
The Gaining Ratio represents the difference between the new profit sharing ratio and the old ratio.
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