Accountancy · Ch 3 — Reconstitution of a Partnership Firm — Retirement/Death of a Partner
New Profit Sharing Ratio
New Profit Sharing Ratio
The Core Idea
When a partner retires or dies, the partnership agreement changes. The remaining partners must decide how they will share the firm’s future profits. This new ratio is called the New Profit Sharing Ratio. It is simply the ratio in which the continuing partners will share profits from that point onward.
Every continuing partner’s new share is made up of two parts:
- Their old share (what they already had)
- Plus the share they acquire from the retiring or deceased partner
The textbook presents three possible situations. Each one leads to a different way of calculating the new ratio.
Situation (a): No Specific Agreement — Acquire in Old Ratio
If the continuing partners do not explicitly state how they will take over the retiring partner’s share, the law assumes they take it in their old profit sharing ratio (the ratio that existed among them before retirement).
In this case, the new ratio among the continuing partners is simply their old ratio. No calculation is needed.
When nothing is mentioned about how the retiring partner’s share is acquired, the continuing partners are assumed to take it in their old profit sharing ratio. Their new ratio equals their old ratio.
Example: Asha, Deepti, and Nisha share profits in the ratio 3:2:1. Deepti retires. Asha and Nisha continue. Their old ratio (Asha : Nisha) was 3:1. So their new profit sharing ratio is 3:1 — unless they decide otherwise.
Situation (b): Acquire in a Different Proportion (Gaining Ratio Given)
Sometimes the continuing partners agree to take the retiring partner’s share in a proportion that is different from their old ratio. In that case, you must compute the new ratio.
The formula is:
New Share of a Continuing Partner = Old Share + Share Acquired from the Outgoing Partner
The Gaining Ratio is the ratio in which the continuing partners acquire the retiring partner’s share. It is given in the problem.
Example: Naveen, Suresh, and Tarun share profits in the ratio 5:3:2. Suresh retires. Naveen and Tarun take Suresh’s share in the ratio 2:1.
Step 1: Identify the retiring partner’s share.
Suresh’s share = 3/10
Step 2: Calculate the share acquired by each continuing partner.
Gaining ratio = 2:1 (Naveen : Tarun)
Share acquired by Naveen = (2/3) × (3/10) = 2/10
Share acquired by Tarun = (1/3) × (3/10) = 1/10
Step 3: Add the acquired share to each partner’s old share.
Naveen’s old share = 5/10
Naveen’s new share = 5/10 + 2/10 = 7/10
Tarun’s old share = 2/10
Tarun’s new share = 2/10 + 1/10 = 3/10
Step 4: Express as a ratio.
New profit sharing ratio of Naveen and Tarun = 7:3
Situation (c): Partners Agree on a Specified New Ratio
The continuing partners may simply agree on a new ratio directly. In that case, the ratio they specify becomes the new profit sharing ratio. No calculation is needed — the agreed ratio is the answer.
Key Distinction: Gaining Ratio vs New Profit Sharing Ratio
Do not confuse these two. They are related but different.
- Gaining Ratio is the ratio in which the continuing partners acquire the retiring partner’s share. It is used to calculate the new ratio in situation (b).
- New Profit Sharing Ratio is the final ratio in which the continuing partners will share all future profits.
In situation (a), the gaining ratio equals the old ratio. In situation (b), the gaining ratio is given separately.
Summary of the Three Cases
| Situation | What is given | How to find new ratio |
|-----------|---------------|-----------------------| …