What is the Gain Ratio?

The Gain Ratio is calculated when a partner quit or retire from the business, and the other continues to do the business in that company. The gain ratio is also known as the retirement of a partner. In other words, when a partner leaves or retires from the firm due to some reasons like bad health, old age, etc., the existing agreement and partnership come to an end. However, the current individual’s formats a new partnership agreement with new fresh terms and conditions.

When a partner leaves a company, the profit ratio of the existing partner’s changes after they acquire the retiring partner’s share and distribute amongst each other.

A partner can retire.

  • With the mutual consent of all the partners
  • As per the partnership agreement
  • With her/his own will

Gain Ratio in Accounting Issues

Though terms and condition of retirement are mentioned in the partnership agreement. But few accounting issues that the company has to deal with are mentioned below:

  • New gaining and new profit sharing ration
  • Amending new changes and evaluation of the cost of assets and liabilities
  • Goodwill
  • Clearance of retiring partners dues
  • Dealing with accumulated profits and reserve
  • The new capital of the existing partners

The formula to Gain Ratio

Gain Ratio = New Ratio – Old Ratio

Example

Deepa, Aravind, and Deepak divided profit and losses in the ratio of 3:2:1, respectively. Deepa retires and Arvindh and Deepak decide to divide Amit’s share in the existing ratio i.e. 2:1. Now calculate the new ratio and gaining ratio.

Solution: The existing ratio between Arvindh and Deepak = 2/6 and 1/6

Deepa’s ratio (retiring partner) = 3/6

Deepa’s share taken by Arvindh and Deepak in the ratio of 2:1

Arvindh gets = 3/6 * 2/3 = 6/18

Deepak gets = 3/6 * 1/3 = 3/18

New ratio between Arvindh and Deepak is = 6:3 = 2:1

Gaining ratio= New Ratio – Old Ratio

Arvindh’s gain = 2/3 – 2/6 = 2/6

Deepak’s gain = 1/3 – 1/6 = ⅙

Gaining ratio = 2:1

New Ratio = 2:1

The above mentioned is the concept, that is elucidated in detail about ‘What is gain ratio?’ for the Commerce students. To know more, stay tuned to BYJU’S.

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