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When a partner of a firm either retires or dies, then the profit-sharing ratio (the ratio in which the profits or even losses are shared among the firm’s partners) of all other partners changes. It simply means the reconstitution of the firm concerning the profit and losses due to the loss or addition of its partners. It is critical to know about the gaining ratio of both partners and the firm, as this information is necessary for entries to be made in partnership accounts. Therefore, the retirement, death, or even admissions of new partners are important factors that contribute to changing of profit ratio of existing partners. The partners do not always share equal profit or losses in the firm; therefore, the gaining ratio for every organisation shall differ. The formula for gaining ratio helps in the determination of it. Let’s study the formula and examples of gaining ratio in brief.
Define Gaining Ratio
The gaining ratio can be defined as the tool or equipment to calculate the ratio in which the profits and losses of the retired or dead partner are distributed among the remaining partners.
The retiring partner is entitled to his share of goodwill at the time of retirement, or his death, as the goodwill earned by the firm also includes the contribution of the dead or retired partner with other existing partners. And due to present goodwill, the firm will also succeed in the future; therefore, it is necessary to compensate the retiring or deceased partner. The agreement among the partners will evaluate this goodwill. In case of retirement or death of any partner, the adjustment for the goodwill shall be by the partner’s capital accounts, and the retiring or deceased partner gets his credit in his share of goodwill. Moreover, the continuing partner’s accounts will be debited in their gaining ratio.
Calculation of Gaining Ratio
There are two methods of calculating the gaining ratio. Take a look:
- If there are no new profit-sharing ratios of the remaining partners in question, we will assume that they continue to share their profit in the old profit-sharing ratio
- Therefore, the gain ratio for the existing partners will also be in the same old ratio
- If the existing partners have a new profit sharing ratio, then we can calculate the gaining ratio by subtracting the old ratio from the new ratio
The formula for Gaining Ratio:
Gaining ratio = New Ratio- Old Ratio
Examples of Gaining Ratio
Example 1- Damon, Stefan and Klaus are partners sharing profits and losses in the ratio of 4:3:2. Stefan retires, therefore Damon and Klaus decide to share the profits and losses in future in the ratio of 5:4. Calculate their gaining ratio by the formula of gaining ratio.
Solution:
As we know, the formula of gaining ratio= New Ratio- Old Ratio
Gaining ratio of Damon= 5/9-4/9
=1/9
Gaining ratio of Klaus= 4/9-2/9
=2/9
Gaining ratio between Damon and Klaus= 1/9:2/9
= 1:2.
The gaining ratio for Damon and Klaus shall be 1:2.
Example 2- Rachel, Monica, and Phoebe are three partners who share their profits in the ratio of 3:2:1. Calculate the gaining ratios of Monica and Phoebe when Rachel retires.
Solution:
The new profit ratio of Monica and Phoebe after the retirement of Rachel is not given. Therefore, as already mentioned above, we shall assume that the remaining partners’ gaining ratio, i.e. Monica and Phoebe, shall be the same as their old profit ratio.
Therefore, the gaining ratio of Monica and Phoebe= 2:1.
Example 3- X, Y, and Z are partners in a company sharing profits in the ratio of 1:2:3. Partner X willingly decides to retire. The remaining partners i.e. Y and Z decide to share their profits in the ratio of 3:4. Calculate the gaining ratio of Y and Z by the formula of gaining ratio.
Solution:
The formula of gaining ratio= New Ratio- Old Ratio
Gaining ratio of Y= 3/7-2/6
= 5/42
Gaining ratio of Z= 4/7-3/6
=3/42
Gaining ratio = 5/42:3/42
=5:3
Answer: The gaining ratio of Y and Z shall be 5:3.
Difference between Sacrificing Ratio and Gaining Ratio
Basis of Difference | Gaining Ratio | Sacrificing Ratio |
Meaning | The gaining ratio is the ratio acquired by the existing partners after the retirement or death of any partner | In sacrificing ratio, any old partner sacrifices or surrenders some part of their share for the new partner |
Time of Calculation | Calculated at the time of retirement or death of any partner | As the sacrificing ratio involves new partners, therefore it is calculated at the time of admission of a new partner |
Formula for Calculation | Gaining Ratio= New ratio- old ratio | Sacrificing Ratio= old ratio- New ratio |
Conclusion
The gaining ratio is the ratio calculated when a person, i.e. a firm partner, dies or retires. The profit share is then distributed among the existing partners in a definite ratio, i.e. the gaining ratio. It is important to calculate as this ratio will register in the accounts of the existing partners. The retiring partner will get a share of his goodwill at the time of retirement, as it is believed that this goodwill is the result of his and other partners’ combined efforts. There are two methods of calculation of gaining ratio, firstly when the new profit ratio of the existing partners is present in the question, and secondly if it is not present in the question. The Formula of Gaining Ratio shall equal to the New Ratio minus Old Ratio.
