Gaining Ratio

‘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. This gaining ratio is caused by the reconstitution which generally happens due to the exit or death of any existing partner. Gaining Ratio 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.

In this study, we will be discussing the Gaining ratio, its examples, and other important concepts.

Overview of the Gaining Ratio

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 on how profit and loss are shared among all partners.

Though in a typical setup, the partners of a partnership firm decide to share their 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 organization that 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 the gaining ratio and the correct application of the gaining ratio formula.

What is the Gaining Ratio?

A 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.

The 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 the 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.

Ans: 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

Therefore, 

Monica acquires = 2/6 x ½

Monica’s new share = 3/6 + 1/6

= 4/6

Phoebe acquires = 2/6 x 1/2 

Phoebe’s new share = 1/6 + 1/6

= 2/6

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.

Test Sum - 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.

Difference between Gaining Ratio and Sacrificing Ratio

Check out this table below to find out the 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’ accounts in case of admission, death, or retirement of a partner. It would help you to solve problems based on partnership with much ease.

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