GAINING RATIO

MEANING

The ratio in which the continuing partners acquire the outgoing partner’s share is called the Gaining Ratio. It is the ratio in which the remaining partners will pay the amount of goodwill to the retiring partner. This ratio is calculated by deducting old share in profits from the new share in profits.

WHY GAINING RATIO IS CALCULATED?

The calculation of this ratio is necessary for adjusting the retiring partner’s share of goodwill. Remaining or continuing partners will compensate the outgoing partner by payment of premium for goodwill or goodwill in accordance of their gains.

FORMULA

NEW RATIO-OLD RATIO

HOW IS GAINING RATIO CALCULATED?

This ratio is calculated differently in different situations. These are as follows:

SITUATION 1: When no agreement exists.

In the absence of an agreement, it is assumed that after the retirement of a partner, the remaining partners will continue to share profits in the ratio which existed among them before the retirement of the partner. Thus, in effect, continuing partners gain share of the outgoing partner in the old profit-sharing  ratio. In this situation, profit-sharing ratio is their gain ratio.

EXAMPLE: A, B and C were partners sharing profits in the ratio of 3:2:1. Find out the gaining ratio if A retires.

SOLUTION: Since the new profit-sharing ratio of the remaining partners is not given, gain to the remaining partners, is in their old ratio.

So, if A retires, gain to B and C will be in the ratio of 2:1.

SITUATION 2: When new Profit sharing ratio is given.

If new profit sharing ratio among the remaining partners is given, the gaining ratio will be different. In this case, the gaining ratio is calculated by calculating the gain of each continuing partner. Gain of each continuing partner is calculated by deducting his old share from his new share.

EXAMPLE: A, B and C are partners sharing profits and losses in the ratio of 5:3:2. B retires from the firm and A and C decided to share future profits and losses in the ratio of 3:2. Calculate Gaining Ratio.

SOLUTION: A’s Gain = 5/10-3/5= 1/10

                      B’s Gain= 2/10-2/5=2/10

So, the gain will be 1:2.

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