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The gaining ratio is an accountancy term used frequently in the partnership account. The death, admission, or retirement of the partner leaves a significant impact on the partnership’s firm structure and the sharing of profit and loss. In the typical setup, the failures and the profits are divided equally between the partners in a partnership firm. Whether divided equally or not, standard financial measures are used, referred to as gaining ratio, which we will discuss in today’s article.
Introducing the Gaining Ratio
The gaining ratio can be defined as the financial tool used for measuring the proportion when a partner retires or quits the business. In other words, the gaining ratio can be expressed as the absolute difference between the partners’ new profit-sharing ratio and the old profit-sharing ratio. By using the gaining ratio, the remaining partners can easily calculate the share of the leaving partner or the total amount they would be paying to the outgoing partner. Here is the gaining ratio formula: Gaining ratio = New profit-sharing ratio – Old profit-sharing ratio.
Accounting Issues in the Gaining Ratio
The partnership agreement consists of the terms and the conditions of the partnership on which it is solely dependent. However, there are several accounting terms that the company goes through. These are as follows:
- New profit-sharing and New gaining option
- Evaluation of liabilities and assets cost and Amending recent changes
- Company’s goodwill
- Cleaning the dues of retiring partner
- Dealing with the acclimated reserves and profits
- The existing partners’ new capital.
Gaining Ratio Formula
The gaining ratio formula is expressed as:
Gaining ratio = New profit-sharing ratio – Old profit-sharing ratio
Difference Between Sacrificing Ratio and Gaining Ratio
Parameters | Gaining ratio | Sacrificing ratio |
Definition | The gaining ratio can be described as the proportion of which the firm’s remaining partners share the retiring or deceased partner. | The sacrificing ratio can be described as the proportion of which the firm’s existing partners decide to surrender their share of the profit of the partner who has entered newly. |
Objective | The gaining ratio is mainly used to calculate the compensation extent given to the partner who is going by the gaining partners as the goodwill premium or the goodwill. | The sacrificing ratio promotes computing the compensation amount given by the partner who is entering the firm as a premium of goodwill or goodwill to the sacrificing partners. |
Calculation time | The gaining ratio is mostly calculated during the retirement or death of any partner in a partnership business. | When the new partner enters the firm, the sacrificing ratio is calculated. |
Formula | Here is the formula for calculating the gaining ratio- Gaining ratio = New profit-sharing ratio – Old profit-sharing ratio. | Here is the formula for calculating the sacrificing ratio – Sacrificing ratio = Old profit – sharing ratio – New profit-sharing ratio |
Effect | The effect of the gaining ratio is that it maximises the overall profit of the existing partners. | The effect of the sacrificing partner is that it minimises the profit-sharing of already existing partners. |
Example of Gaining Ratio
Deepa, Manoj, and Deepak have divided the profit and losses as 3:2:1. Out of the three, Deepa retires; as a result, the remaining partners decided to split the Deepa share in the existing ratio, which is 2:1.
Let’s calculate the gaining ratio and the new ratio.
Here is the ratio between Manoj and Deepak, which is 2/6 and ⅙
Deepa is the retiring partner whose ratio is 3/6
At this point, Manoj gets = 3/6 * 2/3 = 6/18
Whereas, Deepak gets = 3/6 * 1/3 = 3/18
This means the new ratio between the existing partners is 6:3 = 2:1
By applying the formula of gaining ratio where Gaining ratio= New Ratio – Old Ratio
Manoj’s gain will be 2/3 – 2/6 = 2/6
Deepak’s gain will be 1/3 – 1/6 = ⅙
The Gaining ratio is 2:1
Whereas the New Ratio will be 2:1
Conclusion
With this, we come to an end to our study material on the Gaining ratio. The gaining ratio is an accountancy term used frequently in the partnership account. In a partnership firm, the partner’s death, admission, or retirement leaves a significant impact on the firm structure and the sharing of profit and loss. In the typical setup, in a partnership firm, the losses and profits are divided equally between the partners. We also discussed the formula of gaining ratio in detail, which is Gaining ratio = New profit-sharing ratio – Old profit-sharing ratio.
