In a partnership firm, the admission, retirement or death of a partner tends to lay a significant impact not just on the structure of a firm but also how profit and loss are shared among all partners.
Though in a typical setup, the partners of a partnership firm decide to share its profits and losses equally, it may not be the same in every case. For instance, the acquisition of profits in a limited liability partnership firm would be different from that of an organisation which shares profits and losses equally.
However, they all use a standard financial measure, namely, the gaining ratio to ascertain each partner’s share of profit accurately.
That being said, let’s read along to find more about gaining ratio and the correct application of gaining ratio formula.
What is Gaining Ratio?
Gaining ratio is a financial tool that helps to measure the proportion in which a firm’s remaining partners acquire the retiring partner or deceased partner’s shares. It can also be described as the difference between the old profit sharing ratio and the new profit sharing ratio of partners.
Usually, it is computed when a partner decides to retire or during the death of a partner. By applying the gaining ratio formula, remaining partners would be able to estimate the amount they would have to pay to their outgoing partner or representatives of their deceased partner in the form of goodwill or premium on goodwill.
Gaining ratio formula can be expressed as –
Gaining ratio = New profit sharing ratio – Old profit sharing ratio
Let’s take a quick look at this simple example mentioned below to understand more about the new profit sharing ratio and gaining ratio.
When Does One Need to Calculate Gaining Ratio?
Typically, during the admission, death or retirement of a partner, there is a need for the calculation of sacrificing and gaining ratio.
That being said, it is mostly calculated under these specific situations –
When nothing about the new profit-sharing proportion is mentioned.
In a situation where a firm’s partnership agreement states unequal gain or equal gain.
When the new profit share is mentioned.
Example 1: In Case a Retiring Partner’s Share is Acquired by Remaining Partners in the Old Ratio.
Rachel, Monica and Phoebe decide to share their firm’s earnings and losses as 2:3:1. When Rachel retires, Phoebe and Monica decide to share her shares equally. Here’s how the new profit sharing ratio and gaining ratio would be calculated –
The retiring partner, Rachel’s share = 2/6
Monica and Phoebe acquire Rachel’s share in the ratio of 1:1
Monica acquires = 2/6 x ½
Monica’s new share = 3/6 + 1/6
Phoebe acquires = 2/6 x 1/2
Phoebe’s new share = 1/6 + 1/6
Hence, the new profits sharing ratio of Monica and Phoebe = 4:2 = 2:1
While, as per the question the gaining ratio is 1:1
Check Your Progress: Solve this problem to evaluate your progress. Raj, Sheldon and Penny share profit in the ratio of 4:5:2. Raj retires, and Penny decides to acquire his share. With this information, calculate the new profit sharing ratio as well as the gaining ratio of both Penny and Sheldon.
Now that we have become somewhat familiar with the feasible situations for applying gaining ratio let’s try to find out the basic differences between sacrificing ratio and gaining ratio.
Check out this table below to find out differences between these two financial measures.
Learn how to use the gaining ratio formula under different situations to calculate the new profit-sharing proportion of the partners in a partnership firm by referring to our compact chapter-wise solutions. Also, by enrolling in Vedantu’s live online class, you would gain valuable insight into the adjustment of partners’ account in case of admission, death or retirement of a partner. It would help you to solve problems based on partnership with much ease.
So, what are you waiting for? Download Vedantu App now to benefit your board exam preparation significantly!
1. What is the Gaining Ratio?
Ans. Gaining ratio can be explained as the difference between new profit sharing ratio and old profit sharing ratio. It is applied when a partner opts to retire or in case of death of a partner.
2. How to Find a Gaining Ratio?
Ans. As per gaining ratio formula, one needs to deduct the new ratio of the remaining partners from their old ratio. It is expressed as –
Gaining ratio = New ratio – Old ratio
3. How to Calculate the New Profit Sharing Ratio?
Ans. Depending upon a firm’s partnership agreement, the new profit ratio is calculated. For example, in case of admission of a new partner, the new profit sharing ratio formula would be applied. Wherein the gaining ratio would be deducted from old partners’ existing ratio.
4. What is the Sacrifice Ratio in Partnership?
Ans. The sacrifice ratio in partnership can be defined as the proportion in which existing partners agree to forego their share in favour of a new partner. The sacrifice ratio formula in partnership is expressed as –
Sacrifice ratio = Old profit sharing ratio – New profit sharing ratio