New Profit-Sharing Ratio and Gaining Ratio

When a partner retires or dies, the partners who remain in the firm must agree on a new profit-sharing ratio — the ratio in which they will share profits and losses going forward.

Default rule. If nothing special is agreed, the continuing partners acquire the outgoing partner's share in their own OLD mutual ratio. In that case, the new ratio between the continuing partners is simply their old ratio recomputed to leave out the outgoing partner, and the gaining ratio works out to be the same as this old ratio between them.

When the continuing partners agree on a specific new ratio (as is common in examination problems), the new ratio is simply given or computed from the terms of the agreement, and the gaining ratio must then be worked out 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 has picked up because of the outgoing partner's exit. It is central to this chapter because it decides who pays for the outgoing partner's share of goodwill (Section 3).

A useful check when computing a gaining ratio: the gains of all the continuing partners, added together, must always equal exactly the share given up by the outgoing partner. If they don't, a computation error has been made somewhere.

| Ratio | What it represents | Used for |

|---|---|---| …