Gaining Ratio is a term that is frequent in the Partnership Accounts. This ratio means the share of profit gained by a partner with some reconstitution of the firm. It is caused by the reconstitution which generally happens due to the exit or death of any existing partner. It is a vital factor for the partners as well as for the newly re-constituted firm. The partners would be willing to know their escalated share of profit in the form of a ratio, while the reconstituted firm needs this information for the further entry and calculation of the partnership accounts.
When a partner leaves a company, the profit ratio of the exiting partner changes after they acquire the retiring partner’s share and distribute it amongst each other.
A partner can retire.
- With the mutual consent of all the partners
- As per the partnership agreement
- With her/his own will
Gaining Ratio in Accounting Issues
Though terms and conditions of retirement are mentioned in the partnership agreement. But few accounting issues that the company has to deal with are mentioned below:
- New gaining and new profit-sharing option.
- Amending new changes and evaluating the cost of assets and liabilities.
- Clearance of retiring partners’ dues.
- Dealing with accumulated profits and reserve.
- The new capital of the existing partner.
Gaining Ratio Formula
Gaining Ratio = New Ratio – Old Ratio
Suresh, Anand, and Deelip divided profit and losses in the ratio of 3:2:1, respectively. Suresh retires, and Anand and Deelip decide to divide Amit’s share in the existing ratio, i.e. 2:1. Now calculate the new ratio and gaining ratio.
Solution: The existing ratio between Anand and Deelip = 2/6 and 1/6
Suresh’s ratio (retiring partner) = 3/6
Suresh’s share taken by Anand and Deelip in the ratio of 2:1
Anand gets = 3/6 * 2/3 = 6/18
Deelip gets = 3/6 * 1/3 = 3/18
New ratio between Anand and Deelip is = 6:3 = 2:1
Gaining ratio= New Ratio – Old Ratio
Anand’s gain = 2/3 – 2/6 = 2/6
Deelip’s gain = 1/3 – 1/6 = ⅙
Gaining ratio = 2:1
New Ratio = 2:1