New Profit-Sharing Ratio and Gaining Ratio on Death of a Partner

The first step after a partner's death is to fix the new profit-sharing ratio in which the continuing partners will share profits and losses going forward.

Default rule. If the partnership deed and the continuing partners are silent on this point, the continuing partners are presumed to acquire the deceased partner's share in their own OLD mutual ratio. In that case, the new ratio between the continuing partners works out to be exactly their old mutual ratio (i.e., their old shares recomputed leaving out the deceased partner), and the resulting gaining ratio turns out to be the same as this old mutual ratio.

When a specific new ratio is agreed (or given in the examination question), the new ratio is simply taken as given, and the gaining ratio must then be calculated separately:

Gaining Ratio = New Share − Old Share (for each continuing partner)

The gaining ratio measures exactly how much extra share of future profits each continuing partner picks up because of the deceased partner's exit, and it decides who funds the goodwill compensation due to the deceased partner's estate (Section 3).

A reliable check on any gaining-ratio calculation: the gains of all the continuing partners, added together, must always equal exactly the share that belonged to the deceased partner. If the two totals don't match, an arithmetic slip has been made somewhere in the calculation.

| Ratio | What it represents | Used for |

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