What is sacrifice ratio and how is it calculated?

Sacrifice ratio = Old Ratio − New Ratio. It shows the proportion in which old partners give up their share to the new partner. Premium for goodwill paid by the new partner is distributed among old partners in their sacrifice ratio.

What is super profit method of goodwill valuation?

Super Profit = Average Profit − Normal Profit (Normal Rate × Capital Employed). Goodwill = Super Profit × Number of Years' Purchase. This method values goodwill based on earnings above the industry-normal return.

Why are old reserves distributed to old partners when a new partner is admitted?

Accumulated profits and reserves belong to the old partners who earned them. Before a new partner joins, these must be distributed to old partners in their old ratio so the new partner does not get an unfair share of past profits.

Goodwill and Admission of a Partner

Reconstitution of Partnership • Class 12 Accountancy • NCERT • CBSE

Goodwill = super profits × years' purchase. Sacrifice ratio = old ratio − new ratio. On admission, new partner brings in capital and goodwill premium. Goodwill raised and written off among old partners in sacrifice ratio.

Key Formulas

Goodwill (Super Profit) = Super Profit × Years' Purchase
Super Profit = Average Profit − Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return
Sacrifice Ratio = Old Ratio − New Ratio

Frequently Asked Questions

What is sacrifice ratio and how is it calculated?: Sacrifice ratio = Old Ratio − New Ratio. It shows the proportion in which old partners give up their share to the new partner. Premium for goodwill paid by the new partner is distributed among old partners in their sacrifice ratio.
What is super profit method of goodwill valuation?: Super Profit = Average Profit − Normal Profit (Normal Rate × Capital Employed). Goodwill = Super Profit × Number of Years' Purchase. This method values goodwill based on earnings above the industry-normal return.
Why are old reserves distributed to old partners when a new partner is admitted?: Accumulated profits and reserves belong to the old partners who earned them. Before a new partner joins, these must be distributed to old partners in their old ratio so the new partner does not get an unfair share of past profits.

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