What is gain ratio formula?

Share

In pursuit to become the world's most used online forum dedicated to Accounting and Finance.

Busiest Accounting and Finance Forum

Lost your password? Please enter your email address. You will receive a link and will create a new password via email.

Please briefly explain why you feel this question should be reported.

Please briefly explain why you feel this answer should be reported.

Please briefly explain why you feel this user should be reported.

This answer was edited.## Introduction

The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.

There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.

## Concept behind gain ratio

A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.

The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.

For example,

Amanda,BillandChangare partners, having a P/L sharing ratio of3:2:1i.e. Amanda is getting 3/6, Bill is getting 2/6 of the same and Chang is getting ⅓ of the profit and lossIf the profit is $6,000 , then Amanda will get

$3,000(3/6 of $6,000) and Bill will get$2,000(2/6 of $6,000) and Chang will get$1,000(1/6 of $6,000).Now

if Amanda retires from the firm,then naturally, Bill and Chang’s share of profit will increase.The profit and loss sharing ratio will now be

2:1(earlier it was 3:2:1) and the share of profit of Bill will be$4,000and of Chang will be$2,000.## Calculation of gain ratio

The formula for calculating gain ratio = New ratio – Old Ratio

As per the above case:

Gain ratio of Bill = 2/3 – 2/6 = 2/6Gain ratio of Chang = 1/3 – 1/6 = 1/6Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1This is how we can calculate the gain ratio. But one thing to notice is that the

gain ratio is equal to the P/L sharing ratioof the partnership between Bill and Chang.Hence, whenever a partner retires and

the existing partner keep the P/L sharing ratio unchanged among themselvesthen,the gain ratio will be equal to their P/L sharing ratio.In that case,there is no needto calculate the gain ratio from the formula given above.But, when the remaining partners

change the P/L sharing ratio among themselvesafter a partner retires, then the gain ratio is to be calculated using the formula given above.Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from

2:1 to 3:2The gain ratio of Bill = 3/5 – 2/6 = 8/30The gain ratio of Chang = 2/5 – 1/6 = 7/30Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7