Success Roar Classes

Introduction and Calculation of Ratio

Introduction and Calculation of Ratio - Success Roar Classes

What is Retirement?

  1. When a partner leaves the firm and ceases to get any share in the future profits of the firm, it is known as the retirement of a partner.
  2.  After the retirement of a partner, the remaining partners can continue to carry on the business of the firm. (Introduction and Calculation of Ratio)
  3. This is one of the modes of reconstitution of partnership in which the old partnership comes to an end and a new partnership comes into existence between the remaining partners.
  4. A partner has the right to retire from the firm after giving proper notice of retirement in advance.
  5. Section 32(1) of the Indian Partnership Act, 1932 provides that a partner may retire from the firm:
    • With the consent of all the partners of the firm.
    • As per the expressed agreement amongst the partners.
    • By issuing a notice for retirement in writing to all the partners.:

        Adjustments Required at the time of Retirement

Following are the various adjustments important to be made at the time of retirement:

  1. Determination of new profit-sharing ratio.
  2. Determination of gaining ratio.
  3. Treatment of goodwill.
  4. Revaluation of assets and liabilities.
  5. Adjustments of reserves and accumulated profits or losses.
  6. Adjustments of capital.
  7. Determination of the amount payable to the retiring partners. (Introduction and Calculation of Ratio)

How to calculate new profit-sharing ratio?

  1. The new profit-sharing ratio is the ratio in which the continuing partners will share profit. In other words, this is the profit-sharing ratio after retirement.
  2. The new share of each remaining partner will be the total of his old share of profit in the firm and the portion share purchased of the retiring partner’s profit.

New share = Old Ratio + Gaining ratio

Cases of Calculating new profit-sharing ratio

  • Case 1 – When the question is silent about distribution of share of retiring partner among remaining partners
  1. When no information is given in the question, the new ratio will be equal to the old ratio of continuing partners. So here New Ratio = Old Ratio
  • Case 2 – When the profit-sharing ratio of retiring is distributed among remaining partners in a specific ratio
    1. This specific ratio can be anything for example 3:2, 1:1, etc.
    2. Steps to calculate the new ratio
      • Calculate the gaining share of remaining partner i.e. ratio of retiring partner x ratio of distribution among continuing partners (Gaining ratio) (Introduction and Calculation of Ratio)
Gaining Share = Ratio of retiring partner x Ratio of distribution
  • Now add old ratio + share of a continuing partner to get new ratio. So here new ratio will be-
New share = Old share + Gaining share

Case 2A – When the share of retiring partner is taken by only a single partner

  • Sometimes the share retiring partner is taken by only one partner, in this case the new ratio of  such partner will be For all other partners, new ratio will be equal to the old ratio.
New ratio = Old ratio + Profit sharing ratio of retiring partner
  • For all other partners, new ratio will be equal to the old ratio.

How to calculate Gaining ratio?

  1. Gaining ratio is also known as benefit ratio in which the continuing partners acquire or purchase the retiring partner’s share is called gain ratio.
  2. It is normally used to compensate the retiring partner.

Gaining ratio = New share – Old Ratio

Cases of Calculating Gaining ratio

Case 1 – When the question is silent about distribution of share of retiring partner among remaining partners

  • When no information is given in the question, the gaining ratio will be equal to the old ratio of continuing partners as it is assumed that old ratio is used to distribute the share of retiring partner. So here –

Gaining Ratio = Old Ratio

Case 2 – When the Old as well as new profit-sharing ratio is given

In this case – Gaining Ratio = New Ratio – Old Ratio

Case 2A– When the share of retiring partner is taken by only a single partner

  • Sometimes the share retiring partner is taken by only one partner of In this case the gaining ratio of that partner will be

Gaining Ratio = Profit sharing ratio of retiring partner

What are the differences between Sacrificing Ratio and Gaining Ratio?

BasisSacrificing RatioGaining Ratio
DefinitionIt is the proportion in which the old partners sacrifice their share in favor of a new partner.It is the proportion in which the old partners acquire the outgoing partner’s share.
Time of CalculationIt is calculated at the time of admission of a new partner.It is calculated at the time of retirement or the death of a partner.
PurposeIt is calculated to know how the old partners shall share the goodwill brought in by the new partner.It is calculated to know how the remaining partners shall contribute towards the share of goodwill of the retiring partner.
FormulaSacrificing ratio = Old ratio – New shareGaining ratio = New share – Old Share
Effects on the share of profitThe old partner’s share decreases.The remaining partner’s share increases.

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