It is necessary to determine the new profit sharing ratio at the time of retirement of a partner because the continuing partners acquire the retiring partner’s share of profit.

**Determination
of new profit sharing ratio and gaining ratio**

It is necessary to
determine the new profit sharing ratio at the time of retirement of a partner
because the continuing partners acquire the retiring partner’s share of profit.
New profit sharing ratio is the agreed proportion in which future profit will
be distributed to the continuing partners. If the new profit sharing ratio is
not agreed, the continuing partners will share the profits and losses equally.

The continuing partners
may gain a portion of the share of profit of the retiring partner. The gain may
be shared by all the partners or some of the partners. Gaining ratio is the
proportion of the profit which is gained by the continuing partners. The
purpose of finding the gaining ratio is to bear the goodwill to be paid to the
retiring partner. The share gained is calculated as follows:

Share gained
= New share – Old share

Gaining ratio =
Ratio of share gained by the continuing partners

**Tutorial note: **When the new profit
sharing ratio is not given in the problem, it is to be** **calculated based on the
information given in the problem.

When new profit sharing
ratio is given, only gaining ratio has to be calculated as follows:

Gaining ratio = Ratio of
share gained by the continuing partners

Share gained = New share
– Old share

**Illustration 7**

Kiran, Vinoth and Vimal
are partners sharing profits in the ratio of 5:3:2. Kiran retires and the new
profit sharing ratio between Vinoth and Vimal is 2:1. Calculate the gaining
ratio.

**Solution**

When new profit sharing
ratio is not given and only one continuing partner gains the entire share of
the retiring partner, new profit sharing ratio is calculated as follows:

New share of continuing
partner = Old share + Share gained

**Illustration 8**

Arya, Benin and Charles
are partners sharing profits and losses in the ratio of 3:3:2. Charles retires
and his share is taken up by Arya. Calculate the new profit sharing ratio and
gaining ratio of Arya and Benin.

When new profit sharing
ratio is not given, but the proportion of share gained on retiring partner’s
share is given, new profit sharing ratio is calculated as follows:

New share of continuing
partners = Old share + Share gained

Share gained = Retiring partner’s share × Proportion of
share gained

**Illustration 9**

Rahul, Ravi and Rohit are
partners sharing profits and losses in the ratio of 5:3:2. Rohit retires and
the share is taken by Rahul and Ravi in the ratio of 3:2. Find out the new
profit sharing ratio and gaining ratio.

**Solution**

**Illustration 10**

Kumar, Kesavan and
Manohar are partners sharing profits and losses in the ratio of 1/2, 1/3 and
1/6 respectively. Manohar retires and his share is taken up by Kumar and
Kesavan equally. Find out the new profit sharing ratio and gaining ratio.

**Solution**

Gaining ratio is 1:1 as
Manohar’s share is taken up by Kumar and Kesavan equally.

When new profit sharing
ratio, share gained and the proportion of share gained is not given, the new
share is calculated by assuming that share gained is the proportion of the old
share. Therefore, the new profit sharing ratio and the gaining ratio among the
continuing partners is their old profit sharing ratio between them.

**Illustration 11**

Raja, Roja and Pooja are
partners sharing profits in the ratio of 4:5:3. Roja retires from the firm.
Calculate the new profit sharing ratio and gaining ratio.

**Solution**

Since, new profit
sharing ratio, share gained and the proportion of share gained is not given,
the new share is calculated by assuming that the share gained is in the
proportion of old ratio. Therefore, the new profit sharing ratio and the
gaining ratio between the continuing partners, Raja and Pooja is their old
profit sharing ratio, that is 4:3.

Tags : Retirement and Death of a Partner | Accountancy Retirement and Death of a Partner | Accountancy

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