Q.What is Gaining Ratio? Why is it computed on the retirement or death of a partner?

Whenever a partner leaves, someone else picks up the slack — the gaining ratio identifies exactly who, and by how much.

Gaining Ratio is the ratio in which the remaining partners acquire the outgoing partner's share of profit, computed as New Share minus Old Share for each of them. It is computed specifically because the outgoing partner must be compensated for the goodwill he or she is giving up, and that compensation should be borne only by the partners whose own future share of profit has actually increased — and in exact proportion to how much each one has gained.

The Gaining Ratio is the ratio in which the remaining partners acquire the share of profit given up by a partner who retires or dies. For each remaining partner, it is calculated as:

Gaining Ratio (for a partner) = New Share − Old Share.

It is computed on retirement or death mainly for one crucial purpose: the treatment of goodwill. When a partner leaves, he or she must be compensated for the share of the firm's goodwill being given up. That compensation is charged to the gaining partners' Capital Accounts — but it would clearly be unfair to charge every remaining partner equally, or in the old ratio, if their gains are unequal (or if, unusually, one remaining partner's share actually falls rather than rises, as can happen when the new ratio is renegotiated on some basis other than a simple 'divide the outgoing share'). By charging the goodwill compensation strictly in the gaining ratio, each remaining partner bears a cost that is exactly proportional to the benefit — the extra future profit share — he or she has received.

A secondary reason it is worked out explicitly is that examination and practical problems often state the new ratio directly (as agreed among the partners) without stating the gaining ratio, so it must be derived before the goodwill adjustment entry can be passed correctly.

Students sometimes define Gaining Ratio correctly but forget to state WHY it matters (i.e., its link to the goodwill adjustment entry) — a "what is X and why is it computed" question needs both the definition and the purpose to earn full marks.