What is Profit Sharing Ratio? Formula, Calculations & Examples
Profit sharing ratio is a central concept in partnership accounting. It refers to the proportion in which partners share profits and losses in a firm. Understanding this topic is crucial for Class 11 and 12 Accountancy exams, CA Foundation, and various business and competitive exams. A clear understanding helps in practical scenarios where partnership terms change.
| Type of Ratio | When Used | Basic Formula | Example |
|---|---|---|---|
| Old Profit Sharing Ratio | Before admission/retirement/change | As per partnership deed or equal | 2:1; 1:1:1 |
| New Profit Sharing Ratio | After change/admission/retirement | Old share – surrendered/additional share | 3:2:1; 4:3; 5:3:2 |
| Sacrificing Ratio | When a new partner is admitted | Old Ratio – New Ratio | 1/6:1/6 |
| Gaining Ratio | When a partner retires | New Ratio – Old Ratio | 2/5:3/5 |
What is Profit Sharing Ratio?
Profit sharing ratio is the agreed proportion in which partners share partnership profits and losses. If not specified in the partnership deed, profits are normally shared equally among partners. This ratio forms the basis for distribution of profits, losses, and even goodwill.
Key Profit Sharing Ratio Formulas and Types
There are different types of ratios in partnership accounting. The most important are old profit sharing ratio, new profit sharing ratio, sacrificing ratio, and gaining ratio. Each is used in specific scenarios like admission, retirement, or a change in partnership terms.
Important Profit Sharing Ratio Formulas
- Old Profit Sharing Ratio: As per existing agreement or deed.
- New Profit Sharing Ratio: Determined after admission, retirement or change in agreement.
- Sacrificing Ratio = Old Ratio – New Ratio (used on admission of a new partner).
- Gaining Ratio = New Ratio – Old Ratio (used on retirement or death of partner).
Common Scenarios
- Admission of a Partner: Existing partners sacrifice a portion of their share for the new partner. Sacrificing ratio is calculated.
- Change in Profit Sharing Ratio: Partners mutually decide to change their shares; a new ratio is calculated.
- Retirement/Death: Remaining partners gain the outgoing partner’s share in a gaining ratio.
MCQs on Profit Sharing Ratios
Practicing MCQs on profit sharing ratios helps students prepare for board and entrance exams. Below are sample exam-style questions to test your understanding of the topic:
| Question | Options | Correct Answer |
|---|---|---|
| 1. Profit sharing ratio is usually determined by: |
(A) Age of partners (B) Partnership deed (C) Partners’ choice (D) Arbitrary decision |
B |
| 2. If not specified, profits are shared: |
(A) According to capital (B) Equally (C) As decided by manager (D) As per goodwill |
B |
| 3. Sacrificing ratio is calculated during: |
(A) Retirement (B) Admission (C) Death (D) Dissolution |
B |
| 4. Gaining ratio is used in: |
(A) Admission of new partner (B) Retirement of partner (C) Sharing profits normally (D) None of these |
B |
| 5. Old partners' sacrifice is equal to: |
(A) New ratio – Old ratio (B) Old ratio – New ratio (C) Equal share (D) None |
B |
Solving Approach for MCQs on Profit Sharing Ratios
When solving questions, carefully read whether the scenario involves admission, retirement, or a mutual change in ratio. Apply the correct formula for sacrificing or gaining ratio as required. Double-check whether ratios are expressed in simplest form or need to be converted to a common denominator. Practice with a mix of conceptual and calculation-based questions for full confidence.
Usage and Importance of Profit Sharing Ratios
Profit sharing ratio concepts are vital for division of profits, calculation of goodwill, and change in ownership structure. These calculations impact other partnership adjustments such as admission and retirement. Students preparing for school or professional exams will often encounter numerical questions and assertion-reason MCQs on this topic.
Internal Links to Related Concepts
- Profit Sharing Ratio: Foundational guide with more solved examples.
- New Profit Sharing Ratio: Step-wise approach to recalculating when partners change.
- Sacrificing Ratio: Why it matters and how to use it.
- Gaining Ratio: How profits are re-distributed in retirement.
At Vedantu, we simplify partnership and profit sharing ratio concepts for students, making board and competitive exam prep stress-free. Understanding these core accounting ratios helps in scoring higher marks and applying the principles in real business scenarios.
In summary, MCQs on profit sharing ratios are essential for mastering partnership accounting. Knowing how to calculate and apply old, new, sacrificing, and gaining ratios ensures clarity in exams and business. Practice and proper use of formulas are key, and for deeper study, refer to Vedantu’s detailed resources on partnership concepts.
FAQs on MCQs On Profit Sharing Ratios: Practice & Concepts for Accounting
1. What is a profit sharing ratio in a partnership?
The profit sharing ratio in a partnership defines how partners divide profits or losses. It's usually detailed in the partnership deed; otherwise, profits are shared equally. This ratio is crucial for partnership accounting and impacts goodwill valuation.
2. How is the profit sharing ratio decided among partners?
The profit sharing ratio is typically determined by a formal agreement (partnership deed). This agreement specifies the percentage or fraction each partner receives. If no agreement exists, the law presumes an equal sharing arrangement among partners. Changes in the ratio occur with partner admission, retirement, or a mutual agreement to change the existing arrangement. This affects calculations for new profit sharing ratio, sacrificing ratio, and gaining ratio.
3. What is the formula for calculating a new profit sharing ratio?
The formula for a new profit sharing ratio depends on the situation (e.g., admission, retirement). For admission of a new partner, it typically involves adjusting the old ratio based on the new partner's share. The sacrificing ratio and gaining ratio calculations are also crucial to determine the adjustments needed. Specific formulas are taught in Class 11 and Class 12 accountancy, and are relevant for CA Foundation exams.
4. What happens if a new partner is admitted?
When a new partner is admitted, the existing partners' profit sharing ratio usually changes. The existing partners may agree to sacrifice a portion of their share to accommodate the newcomer. The calculation of the new ratio involves determining the sacrificing ratio and the gaining ratio. This process is a key topic in partnership accounting, relevant for class 12 and competitive exams.
5. What are sacrificing and gaining ratios?
The sacrificing ratio shows the proportion by which existing partners reduce their share when a new partner is admitted. The gaining ratio indicates how the remaining partners increase their share when a partner retires or leaves. These ratios are essential in adjusting the profit sharing ratio and are vital for understanding changes in partnership structures. They are frequently tested in MCQs on change in profit sharing ratio.
6. Where can I find MCQs on profit sharing ratio for class 12?
MCQs on profit sharing ratio for Class 12 are widely available in various resources. Textbooks like TS Grewal and DK Goel often include practice questions. Online platforms and educational websites offer comprehensive quizzes and practice tests. Vedantu provides numerous MCQs on change in profit sharing ratio, covering various scenarios and calculation types. These multiple-choice questions prepare students for board exams and competitive tests.
7. How is the new and old profit sharing ratio calculated?
Calculating the old and new profit sharing ratios depends on the context. The old ratio represents the initial agreement before any changes. The new ratio is calculated after considering changes such as the admission of a new partner or the retirement of an existing partner. The methods involve using the sacrificing ratio and gaining ratio to adjust the existing partners' shares. This topic often appears in partnership accounting questions.
8. What is the profit sharing ratio in partnership?
In a partnership, the profit sharing ratio dictates how partners distribute profits and losses. This ratio, often outlined in the partnership deed, can be equal or unequal, depending on the agreement. Understanding this ratio is fundamental to partnership accounting and relevant for Class 11 and Class 12 syllabi.
9. How does the profit sharing ratio affect goodwill calculation?
The profit sharing ratio directly impacts goodwill valuation when there are changes in the partnership (like new partner admission or retirement). The sacrificing ratio or gaining ratio is used to allocate the goodwill among partners, reflecting their share adjustment. This is a key concept in partnership reconstitution.
10. What is the difference between change in profit sharing ratio and reconstitution of partnership?
A change in profit sharing ratio is a specific adjustment within an existing partnership, often due to partner admission, retirement, or mutual agreement. Reconstitution of a partnership firm is a broader term encompassing various changes, including ratio adjustments, changes in the firm's capital, and other alterations to the partnership agreement. A change in ratio is *one aspect* of reconstitution.
