Meaning and Explanation
The gaining ratio is the proportion in which one or more partners gain a share in the firm’s profit as a result of other partner(s) sacrifice. It is used to compute the amount of compensation paid by the gaining partners to the ones who are sacrificing their share of profit (known as sacrificing ratio). The compensation is paid in the form of goodwill.
Following are the various events wherein gaining ratio is usually calculated;
- If the partners decide to change their profit sharing ratio to divide the profit more appropriately & motivate the partners to work more efficiently,
- Retirement of an existing partner will result in a sacrifice of share of profit by such a partner, due to which the remaining partners will gain a profit share,
- Likewise, in the case of the death of a partner, the remaining partners will again gain a share in the firm’s profit, equal to the profit-sharing ratio of the deceased partner.
Thus, the total gain received by gaining partners is always equal to the total amount of sacrifice made by the sacrificing partners.
Related Topic – What is a Revaluation Account?
How to Calculate Gain Ratio
Knowledge of the following two ratios is necessary to calculate the gaining ratio for each of the partners who are gaining a share in the partnership firm’s profits.
- Old Profit-Sharing Ratio – It is the ratio in which the existing partners have been sharing the profits & losses until the change in their profit sharing ratio/change in the terms of the partnership agreement.
- New Profit-Sharing Ratio – It is the ratio in which all the partners including the newly admitted partners will share the future profits & losses of the partnership firm.
- Determine the new profit sharing ratio of the old partners – The new profit sharing ratio is either mentioned as per the agreement between the partners or is the same as the old ratio between them when nothing is mentioned.
- Calculate the Gain Ratio – The gaining ratio is the difference between the new and old profit sharing of the remaining partners.
Hence, the Gaining Ratio refers to the ratio in which one or more partners acquire the share of profit from the sacrificing partners & is equal to the difference between the new & the old shares of the respective gaining partners.
Related Topic – Components of Financial Reporting
Gain ratio is equal to the difference between the new profit sharing ratio and the old profit sharing ratio of the gaining partner. It is computed separately for each gaining partner.
Note – The aggregate amount of gain made by some partners is always equal to the aggregate amount of sacrifice made by others.
Therefore, Gaining Ratio (of all the gainers) = -Sacrificing Ratio (of all the sacrificers)
= -(Old profit sharing ratio – New profit sharing ratio)
= (New profit sharing ratio – Old profit sharing ratio)
Suppose P, Q, R & S are four partners sharing profits in the ratio 4: 3: 2: 1. Partner P dies and as per the new agreement, the remaining partners decide to share profits equally.
Therefore, after P’s death;
New profit sharing ratio of Q, R & S = 1: 1: 1
Calculation of gaining ratio;
Q’s gaining ratio = New share – Old share = 1/3 – 3/10 = 1/30
R’s gaining ratio = 1/3 – 2/10 = 4/30
S’s gaining ratio = 1/3 – 1/10 = 7/30
Total gain made by all the partners = 1/30 + 4/30 + 7/30 = 12/30 or 4/10
Sacrificing ratio for for partner P = 4/10
Gaining ratio of Q, R & S = 1: 4: 7
That is, Q, R & S will gain 1/12, 4/12 & 7/12 respectively because of the lost partner P.
Gaining Ratio Vs Sacrificing Ratio
|Basis||Gaining Ratio||Sacrificing Ratio|
|Meaning||It is the proportion in which one or more partners gain a share in the profit of the firm.||It is the proportion in which one or more partners forgo their share in the profit of the firm.|
|Purpose||To find the amount of compensation (goodwill, etc.) to be paid by the gainers.||To ascertain the amount of compensation to be received by the sacrificers.|
|Computation||The old share is subtracted from the new share.||The new share is subtracted from the old share.|
|Event||Usually computed in the event of the admission of a new partner or change in profit sharing ratio of the existing partners upon mutual consent.||Calculated at the time of death or retirement of an existing partner or change in profit sharing ratio of the existing partners.|
|Compensation||Compensation is paid by the gaining partners to the ones who are sacrificing.||Compensation is received by the sacrificing partners for foregoing their share in profit.|