Profit-sharing ratio
A profit-sharing ratio specifies how partners divide the relevant residual profit or loss. Convert the ratio into fractions of its total before allocating amounts. It need not match capital contributions or cash drawings. When a new partner is admitted, distinguish the old ratio from the new ratio and apply each to the correct pre-change or post-change amounts.
Worked example
A:B share 3:2, so a $25,000 residual profit gives A $15,000 and B $10,000. A later admission may change those fractions.
Common mistake
Do not apply a newly agreed ratio retrospectively to profit earned before the admission date unless the terms explicitly require it.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | K1 | Direct | July 2027–August 2028 |
Related terms
Also called: Partnership profit ratio