Gain Ratio Formula and Calculation Explained for Class 12
Gain ratio is an important topic in partnership accounting, helpful for Class 12 students, commerce learners, and those preparing for competitive exams. Understanding the gain ratio helps solve questions on partnership reconstitution such as admission, retirement, or death of a partner. Mastering this concept will improve your performance in accountancy questions and deepen business knowledge.
| Term | Meaning | Formula | Used When |
|---|---|---|---|
| Gain Ratio | Proportion in which remaining partners acquire the outgoing partner's share | Gain Ratio = New Ratio – Old Ratio | Partner’s retirement or death |
| Sacrificing Ratio | Proportion in which old partners give up share for new partner | Sacrificing Ratio = Old Ratio – New Ratio | Admission of new partner |
What is Gain Ratio?
Gain ratio is the difference between the new profit sharing ratio and the old profit sharing ratio for each partner. In partnership accounting, gain ratio tells us how much extra share the remaining partners will get from the retiring or deceased partner’s share. This is important for correct goodwill adjustment and fair profit distribution.
When is Gain Ratio Used?
- On retirement of a partner
- When a partner passes away
- During reconstitution of a partnership firm
- For goodwill and profit adjustment entries
Gain Ratio Formula and Calculation
The standard formula for gain ratio in partnership is:
Gain Ratio = New Profit Sharing Ratio – Old Profit Sharing Ratio (for each continuing partner)
| Partner | Old Ratio | New Ratio | Gain (New – Old) |
|---|---|---|---|
| Ajit | 5/10 | 3/5 | 3/5 – 5/10 = 1/10 |
| Gaurav | 2/10 | 2/5 | 2/5 – 2/10 = 2/10 |
Worked Example
Suppose Ajit, Dino, and Gaurav share profits in the ratio 5:3:2. Dino retires. Ajit and Gaurav decide their new profit sharing ratio is 3:2. The gain ratio:
- Ajit’s share: 3/5 – 5/10 = 1/10
- Gaurav’s share: 2/5 – 2/10 = 2/10
So, Ajit and Gaurav gain in the ratio 1:2.
Gain Ratio vs. Sacrificing Ratio
| Basis | Gain Ratio | Sacrificing Ratio |
|---|---|---|
| Definition | Proportion by which remaining partners gain outgoing partner’s share | Proportion by which old partners sacrifice for a new partner |
| When Used | Retirement/Death | Admission |
| Formula | New Ratio – Old Ratio | Old Ratio – New Ratio |
| Application | Goodwill credited to gaining partners | Goodwill debited to sacrificing partners |
Exam-Oriented Points to Remember
- Gain ratio = New profit sharing ratio – Old ratio
- Calculated during retirement or death of a partner
- Used for proper allocation of goodwill
- Helps to distribute retiring partner’s share fairly
- Answer in one sentence: Gain ratio is the proportion in which remaining partners gain the outgoing partner’s share
Real-World Application of Gain Ratio
Gain ratio applies whenever there is a change in partnership firm such as the retirement of a partner. It ensures fair division of future profits and sets the basis for partnership accounting records. This concept appears in board exam questions and practical case studies.
Internal Links for Further Learning
- Sacrificing Ratio: Know how partners share profits when a new partner joins.
- New Profit Sharing Ratio: Learn to calculate adjusted ratios after changes in partnership.
- Reconstitution of Partnership Firm: Understand all adjustments and entries during partnership change.
- Death of a Partner: Explore steps and accounting for settlement after a partner's death.
- Goodwill: How gain ratio is related to goodwill calculation.
- Accounting for Partnership Firm: Comprehensive guide with examples and solutions.
At Vedantu, we simplify complex commerce topics like gain ratio for quick learning and exam success. Gain ratio is essential for fair accounting when a partner retires or dies, ensuring smooth business continuity and clear financial records for students and professionals.
FAQs on What Is Gain Ratio in Accounting?
1. What is meant by gain ratio?
The gain ratio represents the proportion in which the remaining partners share the profits gained from an outgoing partner's share in a partnership. It's calculated by comparing the old and new profit-sharing ratios.
2. How is gain ratio calculated in a partnership?
The gain ratio is calculated by subtracting each partner's old profit-sharing ratio from their new profit-sharing ratio. Gain Ratio = New Profit Sharing Ratio - Old Profit Sharing Ratio. A positive result indicates a gain, while a negative result indicates a sacrifice. This is crucial for understanding partnership reconstitution and profit adjustments.
3. What is the difference between gain ratio and sacrificing ratio?
The gain ratio shows how much each partner *gains* when a partner leaves, while the sacrificing ratio indicates how much each partner *gives up* in their share of profits. They are opposites; one partner's gain is another's sacrifice. Understanding both is vital for partnership accounting.
4. Can you state the gain ratio formula for Class 12 exams?
The gain ratio formula for Class 12 is: Gain Ratio = New Profit Sharing Ratio - Old Profit Sharing Ratio. Remember to apply this formula to each partner individually to determine their respective gains.
5. What is gain ratio in one simple sentence?
Gain ratio is the difference between a partner's new and old profit-sharing ratios after a change in partnership structure.
6. What is the gaining ratio answer?
There's no single 'gaining ratio answer'. The gaining ratio varies depending on the individual partners' old and new profit-sharing ratios within a partnership. It's calculated individually for each partner.
7. What is gain ratio in decision tree?
In a decision tree, the gain ratio is a metric used to evaluate the importance of attributes when building a decision tree model, aiding in selection of the best attribute for splitting nodes. It helps to avoid the bias of attributes with many values by penalizing attributes with many branches.
8. What is gain ratio or benefit ratio?
While similar in concept, the terms are used in different contexts. Gain ratio (in accounting) determines profit distribution changes in partnerships; benefit ratio (or benefit-cost ratio) is a financial analysis tool comparing project benefits to its costs.
9. What is a good gain/loss ratio?
A 'good' gain/loss ratio depends on the context. In trading, a ratio significantly above 1 indicates profitable trades. In project management, a high benefit-cost ratio signifies a worthwhile project. There is no universal standard.
10. What is gain ratio in partnership?
In a partnership, the gain ratio is the proportion in which the continuing partners share the profits of the outgoing partner. It's crucial for accurately adjusting profit-sharing after a partner's retirement or death.
11. What is sacrifice and gain ratio?
The sacrificing ratio and gain ratio are used in partnership accounting when there's a change in the profit-sharing ratio. The sacrificing ratio shows the proportions in which the existing partners reduce their share of profits. The gain ratio shows the proportions in which the existing partners increase their share of profits.
12. What is gain ratio example?
Let's say A and B share profits equally (old ratio 1:1). A retires and C joins with a new ratio of 2:1 (A:B). B's new share is 1/3. B gained 1/3 - 1/2 = -1/6 B sacrificed 1/6. C gained 2/3 (new share). C's gain ratio is 2/3.
