Determination of new profit sharing ratio and gaining ratio

Determination of new profit sharing ratio and gaining ratio

1. New profit sharing 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.

2. Gaining ratio

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.

Calculation of gaining ratio and new profit sharing ratio under different situations

1. When new profit sharing ratio is given

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

2. When new profit sharing ratio is not given

(a) Only one partner gains the retiring partner’s share

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.

(b) More than one partner gains the retiring partner’s share

(i) Proportion of share gained on retiring partner’s share is given

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.

(ii) Proportion of share gained is not given

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.

3. Differences between the sacrificing ratio and the gaining ratio