Step by step guide how to calculate change in profit sharing Ratio in partnership business
Calculating the change in profit-sharing ratio in a partnership business involves a few steps. Let's walk through it with an example:
Step 1: Understand the Current Ratio
Consider a partnership with partners A, B, and C sharing profits in the ratio 3:2:1.
Step 2: Determine the Change in Ratio
Suppose there is a change, and now the partners want to share profits in the ratio 2:2:1.
Step 3: Find the Total Old Ratio and Total New Ratio
Old Ratio: 3 + 2 + 1 = 6
New Ratio: 2 + 2 + 1 = 5
Step 4: Calculate the Adjustment Ratio
Adjustment Ratio = New Ratio - Old Ratio
= 5 - 6
= -1
Step 5: Distribute the Adjustment
Now, distribute the adjustment ratio among the partners based on their existing ratio.
Adjustment for A = (3/6) * (-1) = -0.5
Adjustment for B = (2/6) * (-1) = -0.33
Adjustment for C = (1/6) * (-1) = -0.17
Step 6: Apply the Adjustments
Apply the adjustments to the existing ratio:
New Ratio for A = 3 - 0.5 = 2.5
New Ratio for B = 2 - 0.33 = 1.67
New Ratio for C = 1 - 0.17 = 0.83
Step 7: Verify the New Ratios
Ensure that the new ratios add up to the total new ratio (in this case, 5:5:1).
So, the new profit-sharing ratio is 2.5:1.67:0.83.
This method ensures a smooth transition in profit-sharing ratios when there's a change in the partnership agreement.
