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karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

New Profit Sharing Ratio New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of any partner. The new share of each of the remaining partner will consist of his own share in the firm plus the share acquired from the retiring /deceased partner. Consider the following situations :

(a) normally, the continuing partners acquire the share of retiring or deceased partners in the old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as it will be same as the old profit sharing ratio among them. In fact, in the absence of any information regarding profit sharing ratio in which the remaining partners acquire the share of retiring/deceased partner, it is assumed that they will acquire it in the old profit sharing ratio and so share the future profits in their old ratio. For example, Asha, Deepti and Nisha are partners in a firm sharing profits and losses in the ratio of 3:2:1. If Deepti retires, the new profit sharing ratio between Asha and Nisha will be 3:1, unless they decide otherwise.

(b) The continuing partners may acquire the share in the profits of the retiring/deceased partner in a proportion other than their old ratio, In that case, there is need to compute the new profit sharing ratio among them,and it will be equal to sum total of their respective old share and the share acquired from the retiring/deceased partner.

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Gaining Ratio The ratio in which the continuing partners have acquired the share from the retiring/deceased partner is called the gaining ratio. Normally, the continuing partners acquire the share of retiring/deceased partner in their old profit sharing ratio, In that case, the gaining ratio of the remaining partners will be the same as their old profit sharing ratio among them and there is no need to compute the gaining ratio, Alternatively, proportion in which they acquire the share of the retiring/deceased partner may be duly spacified. In that case, again, there is no need to calculate the gaining ratio as it will be the ratio in which they have acquired the share of profit from the retiring deceased partner. The problem of calculating gaining ratio arises primarily when the new profit sharing ratio of the continuing partners is specified. In such a situation, the gaining ratio should be calculated by, deducting the old share of each continuing partners from his new share.

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

New profit sharing ratio and gaining ratio

As soon as a partner retires the profit sharing ratio of the continuing partners get changed. The share of the retiring partner is distributed amongst the continuing partners. In the absence of information, the continuing partners take the retiring partner’s share in their profit sharing ratio or in an agreed ratio. The ratio in which retiring partner’s share is distributed amongst continuing partners is known as gaining ratio. It is Gaining Ratio = New Ratio – Existing Ratio

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Various cases of new ratio and gaining ratio are illustrated as follows:

(i) Retiring partner’s share distributed in Existing Ratio :

In this case, retiring partner’s share is distributed in existing ratio amongst the remaining partners. The remaining partners continue to share profits and losses in the existing ratio. The following example illustrates this :

Tanu, Manu and Rena are partners sharing profits and losses in the ratio of = 4 : 3 : 2. Tanu retires and remaining partners decide to take Tanu’s share in the existing ratio i.e. 3 : 2. Calculate the new ratio of Manu and Rena.

Existing Ratio between Manu and Rena = 3/9 and 2/9

Tanu’s Ratio (retiring partner) = 4/9

Tanu’s share taken by the Manu and Rena in the ratio of 3 : 2

Manu’s gets = 4/9 × 3/5 = 12/45

Manu’s New Share = 3/9 + 12/45 = 27/45

Rena’s gets = 4/9 × 2/5 = 8/45

Rena’s New Share = 2/9 + 8/45 = 18/45

New ratio between Manu and Rena is 27/45 : 18/45 = 27 : 18 = 3 : 2.

Gaining Ratio = New Ratio – Existing Ratio Manu Gain = 27/45 – 3/9 = 12/45

Rena Gain = 18/45 – 2/9 = 8/45 12/45 : 8/45 3 : 2

You may note that the new ratio is similar to existing ratio that existed between Manu and Rena before Tanu’s retirement.

Note: In absence of any information in the question, it will be presumed that retiring partner’s share has been distributed in existing ratio.

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

(ii) Retiring partner’s share distributed in Specified proportions: Sometimes the remaining partners purchase the share of the retiring partner in specified ratio. The share purchased by them is added to their old share and the new ratio is arrived at. The following example illustrates this:

A B and C are partners in the firm sharing profits in the ratio of 3 : 2 : 1. B retired and his share was divided equally between A and C. Calculate the new profit sharing ratio of A and C. B’s Share = 2/6

B’s share is divided between A and C in the ratio of 1 : 1.

A gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6

A’s New Share = 3/6 + 1/6 = 4/6

C’s gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6

C’s New share = 1/6+1/6 = 2/6

Gaining Ratio Gaining Ratio = New Ratio – Existing, Ratio

Gain of A = 4/6 – 3/6 = 1/6

Gain of C = 2/6 – 1/6 = 1/6

1/6 : 1/6

1 : 1 i.e, equal.

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

(iii) Retiring Partner’s share is taken by one of the partners

The retiring partner’s share is taken up by one of the remaining partners. In this case, the retiring partner’s share is added to that of partner’s existing share. Only his/her share changes. The other partners continue to share profit in the existing ratio. An example illustrating this point is given below:

Anuj, Babu and Rani share profit in the ratio of 5 : 4 : 2. Babu retires and his share is taken by Rani, So Rani’s share is 2/11 + 4/11 = 6/11, Anuj share will remain unchanged i.e, 5/11. Thus, the new profit sharing ratio of Anuj and Rani is 5 : 6.

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Illustration 1

Neru, Anu and Ashu are partners sharing profit in the ratio of 4 : 3 : 2. Ashu retires. Find the new ratio of Neru and Anu if terms for retirement provide the following :

(i) ratio is not given

(ii) equal distribution of Ashu’s share

(iii) Ashu’s share is taken by Neru and Anu in the ratio of 2 : 1

(iv) Anu take over the share of Ashu.

Solution: (i) New profit sharing ratio of Neru and Anu is 4 : 3.

(ii) Ashu’s share = 2/9

Neru gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9

Neru’s New share = 4/9 + 1/9 = 5/9

Anu gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9

Anu’s New Share = 3/9 + 1/9 = 4/9

New profit sharing ratio of Neru and Anu is 5/9 : 4/9 or 5 : 4

Gaining ratio is equal 1/9 : 1/9 = 1 : 1

(iii) Ashu’s Share = 2/9

Neru gets = 2/3 of 2/9 = 2/9 × 2/3 = 4/27

Neru’s new share = 4/9 + 4/27 = 16/27

Anu gets = 1/3 of 2/9 = 2/9 × 1/3 = 2/27

Anu’s new share = 3/9 + 2/27 = 11/27

New profit sharing ratio of Neru and Anu is 16 : 11.

Gaining ratio is 4/27 : 2/27 = 4 : 2 = 2 : 1

(iv) Anu takes over Ashu share fully.

Ashu’s share = 2/9

Anu gets = 2/9

Anu’s new share = 3/9 + 2/9 = 5/9

New profit sharing ratio of Neru and Anu is 4 : 5

Only Anu gains

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Illustration 2

Ashish, Barmon, and Chander are partners sharing profits and losses in the ratio of 2 : 1 : 2 respectively. Chander retires and Ashish and Barman decide to share the profits and losses equally in future. Calculate the gaining ratio.

Solution: Gaining ratio = New Ratio – Existing Ratio

Hence, Ashish gets = 1/2 – 2/5 = 1/10

Barman gets = 1/2 – 1/5 = 3/10

Gaining ratio between Ashish and Barman is 1 : 3

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

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Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

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