Calculation of New Profit Sharing Ratio in case of Retirement/Death

A new profit sharing ratio (in case of retirement/death) is defined as a ratio in which the continuing partners agree to share their future profits and losses. In the case of the retirement/death of a partner, the new profit sharing ratio of the continuing/remaining partners can be described as a sum of their old profit share and a portion of profit share acquired from the outgoing partner. Calculation of New Profit Sharing Ratio is discussed below

Algebraically, New Profit Share of the Continuing Partners = Old Profit Share + Part of Profit Share acquired from the Outgoing Partner.


Calculation of New Profit Sharing Ratio in case of Retirement and Death of a Partner


Generally, in the case of retirement and death of a partner, there arise two cases in which the remaining partners acquire the share of the outgoing or retiring partners. These are:

(i) No information regarding the Acquisition of Profit Share by the Remaining Partners is mentioned.

In this case, no information regarding how the profit share of the outgoing partner is acquired by the remaining partners is mentioned in the question. In this case, the new profit sharing ratio of the remaining partners is computed just by crossing out the share of the outgoing partner.

Example: P, Q, and R are the three partners in the partnership firm sharing profits and losses in the ratio 4 : 3 : 1. On April 01, 2011, Q decided to take retirement from the firm.

Solution: As we can see that in this case, no information is given as to how P and R are acquiring Q’s profit share, so the new profit sharing ratio between P and R is calculated just by crossing out the Q’s share. That is, the new ratio becomes 4 : 3 : 1 i.e. 4 : 1.

(ii) When the share of the retiring or deceased partner is purchased in a particular ratio by the remaining partners.

It may happen that in case of retirement/death of a partner, the profit share of the outgoing partner is acquired by the remaining partners in an agreed/specified ratio. In this case, the new profit sharing ratio of the remaining partners is computed by adding the share of profit acquired from the outgoing partner to their old profit share.

Example: P, Q, and R are the three partners in firm sharing profits and losses in the ratio of 4 : 3 : 2. On April 01, 2011, Q retires from the firm. On his retirement, P and R decided to acquire Q’s profit share in the ratio of 3 : 2. Calculate the new profit sharing ratio.

Solution:

Q’s share in profit = 3/9

P and R decided to acquire his share in the ratio of 3 : 2

Share of Q acquired by P = 3/9 * 3/5 = 9/45

Share of Q acquired by R = 3/9 * 2/5 = 6/45

New Profit Share = Old Profit Share + Share Acquired from Q

P’s new share = 4/9 + 9/45 =29/45

R’s new share = 2/9 + 6/45 = 16/45

∴ New Profit Sharing Ratio = 29 : 16

Important Note: Sometimes, the new profit sharing ratio of the continuing partners is specifically mentioned in the question. So, in such cases, there is no need to calculate the new profit sharing ratio.


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