Understanding the Gaining Ratio in Business Partnerships

Accounting Issues Related to the Gaining Ratio

While the terms and conditions of retirement are typically outlined in the partnership agreement, there are several accounting issues that the company must address. These include:

• The establishment of a new gaining and profit-sharing scheme
• The amendment of changes and assessment of the value of assets and liabilities
• The calculation of goodwill
• The settlement of dues owed by the retiring partner
• The management of accumulated profits and reserves
• The determination of the new capital for the remaining partners

The Formula for Calculating the Gaining Ratio

The Gaining Ratio can be calculated using the following formula:

Gaining Ratio = New Ratio – Old Ratio

An Illustrative Example

Let's consider a situation where three partners, John, Paul, and George, share profits and losses in the ratio of 4:3:2, respectively. John decides to retire, and Paul and George agree to divide John’s share in their existing ratio, i.e., 3:2. Let's calculate their new ratio and the gaining ratio.

Solution: The existing ratio between Paul and George = 3/9 and 2/9

John’s ratio (the retiring partner) = 4/9

John’s share is taken by Paul and George in the ratio of 3:2

Paul receives = 4/9 * 3/5 = 12/45

George receives = 4/9 * 2/5 = 8/45

The new ratio between Paul and George is = 12:8 = 3:2

Gaining ratio= New Ratio – Old Ratio

Paul’s gain = 3/5 – 3/9 = 3/45

George’s gain = 2/5 – 2/9 = 2/45

Gaining ratio = 3:2

New Ratio = 3:2

This example helps clarify the concept of the gaining ratio in the context of a partner's retirement from a business.

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