SimerpreetHelpful In: 1. Financial Accounting > Partnerships What is gain ratio formula? What is gain ratio formula? Share Facebook You must login to add an answer. Username or email* Password* Captcha* Remember Me! Forgot Password? Need An Account, Sign Up Here 1 Answer Voted Recent Ayushi Curious Pursuing CA 2022-08-06T18:33:37+00:00Added an answer on August 6, 2022 at 6:33 pm 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, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting 2/6 of the same and Chang is getting ⅓ of the profit and loss If 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 $4,000 and 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 = 2/6 Gain ratio of Chang = 1/3 – 1/6 = 1/6 Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1 This 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 ratio of the partnership between Bill and Chang. Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above. But, when the remaining partners change the P/L sharing ratio among themselves after 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 3:2 In that case, The gain ratio of Bill = 3/5 – 2/6 = 8/30 The gain ratio of Chang = 2/5 – 1/6 = 7/30 Therefore 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 0 Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Related Questions What are some examples of deferred revenue expenses? Are brands intangible assets? What comes in debit side of Realisation account? What is recorded in the Realisation account? What is not included in Realisation account? What is recorded on the credit side of a Realisation account? Can accounts payable have a debit balance?