When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.
Tony’s Sacrifice = 3/5 – 2/5 = 1/5
Steve’s Sacrifice = 2/5 – 1/5 = 1/5
Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.
Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.
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No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two : Let’s take an example. Following is the balance sheet of X Ltd: Hence, as per the following information, Current Ratio = CuRead more
No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two :
Let’s take an example.
Following is the balance sheet of X Ltd:
Hence, as per the following information,
Current Ratio = Current Assets / Current Liabilities
= Inventories + Trade debtors + Bills receivables + Cash and bank + Prepaid Expenses / Trade Creditors + Bills Payables + Outstanding Salaries
= ₹85,000 + ₹2,50,000+ ₹95,000 + ₹1,50,000 + ₹10,000/ ₹2,00,000 + ₹75,000 + ₹25,000
= ₹6,00,000 / ₹3,00,000
= 2/1 or 2:1
Quick Ratio = Quick Assets / Current Liabilities
= Trade debtors + Bills receivables + Cash and bank / Trade Creditors + Bills Payables + Outstanding Salaries
= ₹2,50,000+ ₹95,000 + ₹1,50,000 / ₹2,00,000 + ₹75,000 + ₹25,000
= ₹5,05,000/ ₹3,00,000
= 41 / 25 or 1.68 : 1
Let’s discuss both ratios in detail.
1. Current ratio:
The current ratio represents the relationship between current assets and current liabilities
Current ratio = Current Assets/Current Liabilities
It measures the adequacy of the current assets to current liabilities. The main question this ratio tries to answer is: – “Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets?”
The generally acceptable current ratio is 2:1. But it depends on the characteristics of the assets of a business to judge whether a specific ratio is satisfactory or not.
2. Quick Ratio: Quick ratio is the ratio between quick assets and current liabilities. It is also known as the Acid Test Ratio. By quick assets, we mean cash or the assets that can be quickly converted into cash ( near cash assets)
Quick Assets = Current Assets – Inventories – Prepaid assets
Quick ratio = Quick Assets/Current Liabilities
Inventories are not considered near cash assets.
The quick ratio is a more conservative approach than the current ratio to measure the short term liquidity of a firm.
It answers the question, “If sales revenues disappear, could my business meet its current obligations with the readily convertible quick funds on hands?”
1:1 is considered satisfactory unless the majority of the quick asset are accounts receivable and the receivables turnover ratio is low.