Calculation of New Profit sharing ratio and Gaining ratio :
At the time of retirement of a partner, the remaining partners acquire some portion of the retiring partner’s share of profit. This necessitates the calculation of new profit sharing ratio of the remaining partners.
New Profit Sharing Ratio:
The ratio in which the continuing partners decide to share the future profits and losses is known as new profit sharing ratio.
New Profit sharing ratio = Old ratio + Gaining ratio
New share = Old share + Acquired share (gain)
The ratio in which the continuing partners acquire the outgoing partner’s share is called as gaining ratio. This ratio is calculated by taking out the difference between new profit shareing ratio and old profit sharing ratio.
Gaining ratio = New ratio – Old ratio
Gain = New share – Old share
The purpose of this ratio is to determine the amount of compensation to be paid by each of the remaining partners as the firm to the retiring partner.