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Gaining Ratio & Goodwill on Retirement

Introduction

In Admission, old partners sacrifice a share for the new partner. In Retirement, the opposite happens: the retiring partner leaves his share, which is taken over (gained) by the continuing partners. Hence, the continuing partners must compensate the retiring partner for this Gain.

1. Gaining Ratio (GR)

It is the ratio in which the continuing partners acquire the share of the retiring/deceased partner.

Formula:

Gaining Ratio = New Ratio - Old Ratio

Logic: My share increased because someone left. My New Share is bigger than my Old Share.

Calculation Illustration

A, B, C share in 3:2:1. B retires.

  • Case I: If nothing is mentioned, the New Ratio of A and C remains 3:1.
    • Gain: They gain B's share (2/6) in the ratio of 3:1.
    • Gaining Ratio = 3:1.
  • Case II: B retires and his share is taken by A and C equally.
    • B's Share = 2/6.
    • A gains = 1/6. C gains = 1/6.
    • Gaining Ratio = 1:1.

2. Treatment of Goodwill

The Retiring Partner is entitled to his share of Goodwill. This amount is Debited to Gaining Partners in their Gaining Ratio and Credited to Retiring Partner.

Journal Entry:

Continuing Partners' Capital A/c ...Dr  (Gain Share)
    To Retiring Partner's Capital A/c       (Total Goodwill)

Note: Goodwill Account is NOT raised in the books (AS-26).

Illustration

A, B, C (3:2:1). B retires.

  • Total Firm Goodwill = ₹60,000.
  • B's Share = 2/6 of 60,000 = ₹20,000.
  • Gaining Ratio (A:C) = 3:1.

Entry:

A's Capital A/c ...Dr (3/4 of 20k)  15,000
C's Capital A/c ...Dr (1/4 of 20k)   5,000
    To B's Capital A/c                  20,000

Comparison: Sacrificing Ratio vs Gaining Ratio

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Exam Notes: Writing the Answer

Question: "Distinguish between Sacrificing Ratio and Gaining Ratio." (5 Marks)

Model Answer:

  1. Meaning: Sacrificing ratio is the ratio of surrender of profit share, whereas Gaining ratio is the ratio of acquisition of profit share.
  2. Time: Sacrificing is calculated at the time of Admission. Gaining is calculated at the time of Retirement/Death.
  3. Formula:
    • SR = Old Ratio - New Ratio.
    • GR = New Ratio - Old Ratio.
  4. Journals: In SR, partners are Credited (compensated). In GR, partners are Debited (they pay).

Summary

  • Gain: Benefit to continuing partners.
  • Compensation: Gaining partners pay the retiring partner.
  • Entry: Gaining (Dr) to Retiring (Cr).
  • AS-26: Self-generated goodwill is never shown in Balance Sheet.

Quiz Time! 🎯

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