What is Gaining Ratio?
‘Gaining Ratio’ is a term that is frequent in the Partnership Accounts. This ratio means the share of profit gained by a partner with some reconstitution of the firm. This gaining ratio is caused by the reconstitution which generally happens due to the exit or death of any existing partner. Gaining Ratio is a vital factor for the partners as well as for the newly re-constituted firm. The partners would be willing to know their escalated share of profit in the form of a ratio, while the reconstituted firm needs this information for the further entry and calculation of the partnership accounts.
In this study, we will be discussing the Gaining ratio, its examples, and other important concepts.
Overview of the Gaining Ratio
In a partnership firm, the admission, retirement, or death of a partner tends to lay a significant impact not just on the structure of a firm but also on how profit and loss are shared among all partners.
Though in a typical setup, the partners of a partnership firm decide to share their profits and losses equally, it may not be the same in every case. For instance, the acquisition of profits in a limited liability partnership firm would be different from that of an organization that shares profits and losses equally.
However, they all use a standard financial measure, namely, the gaining ratio to ascertain each partner’s share of profit accurately.
That being said, let’s read along to find more about the gaining ratio and the correct application of the gaining ratio formula.
What is the Gaining Ratio?
A gaining ratio is a financial tool that helps to measure the proportion in which a firm’s remaining partners acquire the retiring partner or deceased partner’s shares. It can also be described as the difference between the old profit-sharing ratio and the new profit-sharing ratio of partners.
Usually, it is computed when a partner decides to retire or during the death of a partner. By applying the gaining ratio formula, remaining partners would be able to estimate the amount they would have to pay to their outgoing partner or representatives of their deceased partner in the form of goodwill or premium on goodwill.
The gaining ratio formula can be expressed as –
Gaining ratio = New profit-sharing ratio – Old profit-sharing ratio
Let’s take a quick look at this simple example mentioned below to understand more about the new profit-sharing ratio and gaining ratio.
When does One need to calculate the Gaining Ratio?
Typically, during the admission, death, or retirement of a partner, there is a need for the calculation of sacrificing and gaining ratio.
That being said, it is mostly calculated under these specific situations –
When nothing about the new profit-sharing proportion is mentioned.
In a situation where a firm’s partnership agreement states unequal gain or equal gain.
When the new profit share is mentioned.
Example 1: In Case a Retiring Partner’s Share is Acquired by Remaining Partners in the Old Ratio.
Ans: Rachel, Monica, and Phoebe decide to share their firm’s earnings and losses as 2:3:1. When Rachel retires, Phoebe and Monica decide to share her shares equally. Here’s how the new profit-sharing ratio and gaining ratio would be calculated –
The retiring partner, Rachel’s share = 2/6
Monica and Phoebe acquire Rachel’s share in the ratio of 1:1
Therefore,
Monica acquires = 2/6 x ½
Monica’s new share = 3/6 + 1/6
= 4/6
Phoebe acquires = 2/6 x 1/2
Phoebe’s new share = 1/6 + 1/6
= 2/6
Hence, the new profits sharing ratio of Monica and Phoebe = 4:2 = 2:1
While, as per the question the gaining ratio is 1:1.
Test Sum - Check Your Progress
Solve this problem to evaluate your progress. Raj, Sheldon, and Penny share profit in the ratio of 4:5:2. Raj retires, and Penny decides to acquire his share. With this information, calculate the new profit-sharing ratio as well as the gaining ratio of both Penny and Sheldon.
Now that we have become somewhat familiar with the feasible situations for applying gaining ratio let’s try to find out the basic differences between sacrificing ratio and gaining ratio.
Difference between Gaining Ratio and Sacrificing Ratio
Check out this table below to find out the differences between these two financial measures:
Learn how to use the gaining ratio formula under different situations to calculate the new profit-sharing proportion of the partners in a partnership firm by referring to our compact chapter-wise solutions. Also, by enrolling in Vedantu’s live online class, you would gain valuable insight into the adjustment of partners’ accounts in case of admission, death, or retirement of a partner. It would help you to solve problems based on partnership with much ease.
So, what are you waiting for? Download Vedantu App now to benefit your board exam preparation significantly!
FAQs on Government Budget and Economy: Key Insights
1. What is a Government Budget and why is it important for an economy?
A Government Budget is an annual financial statement that presents the estimated receipts and estimated expenditures of the government for the upcoming fiscal year, typically from April 1st to March 31st. It is important because it serves as a central tool for the government to meet its key economic and social objectives, such as allocating resources, managing economic stability, and promoting growth.
2. What are the main objectives of a Government Budget as per the CBSE Class 12 syllabus for 2025-26?
According to the CBSE syllabus, the primary objectives of a Government Budget are:
- Reallocation of Resources: To direct resources towards social and economic priorities through taxation, subsidies, and direct public expenditure.
- Reducing Inequalities in Income and Wealth: To influence income distribution by imposing higher taxes on the rich and spending more on the welfare of the poor.
- Economic Stability: To control economic fluctuations like inflation or deflation by using budgetary policies.
- Management of Public Sector Undertakings: To provide financial support and manage state-owned enterprises.
- Economic Growth: To promote a rapid and balanced rate of economic growth by encouraging savings and investment.
3. What is the difference between revenue receipts and capital receipts in a budget?
The key difference lies in their impact on the government's assets and liabilities. Revenue receipts are those that neither create a liability nor cause a reduction in the assets of the government. Examples include tax revenue (like income tax, GST) and non-tax revenue (like fines, fees). In contrast, capital receipts either create a liability (e.g., borrowings from the public) or reduce an asset (e.g., disinvestment by selling shares of PSUs).
4. How does revenue expenditure differ from capital expenditure? Give examples for each.
Revenue expenditure and capital expenditure are differentiated based on whether they create assets or reduce liabilities.
- Revenue Expenditure: This is expenditure that neither creates any assets nor reduces any liability for the government. It is recurring in nature and is incurred on the normal functioning of government departments. Examples include salaries of employees, pensions, and interest payments.
- Capital Expenditure: This is expenditure that either creates physical or financial assets or causes a reduction in liabilities. It is non-recurring. Examples include building roads, bridges, schools, and repayment of loans.
5. What do the different measures of government deficit—Revenue, Fiscal, and Primary—indicate?
Each deficit measure provides a unique insight into the government's financial health:
- Revenue Deficit: This is the excess of revenue expenditure over revenue receipts. It indicates that the government's own earnings are insufficient to meet its day-to-day operational expenses.
- Fiscal Deficit: This shows the difference between the government's total expenditure and its total receipts, excluding borrowings. It signifies the total borrowing requirement of the government for a fiscal year.
- Primary Deficit: This is calculated by subtracting interest payments from the fiscal deficit. It shows the borrowing requirement of the government, excluding the interest obligation on past debts, and thus reflects the current year's fiscal irresponsibility.
6. How does the government use its budget to influence the distribution of income in the country?
The government uses a two-pronged approach in its budget to reduce income inequality. Firstly, it employs a progressive taxation policy, where higher tax rates are imposed on individuals and companies with higher incomes. Secondly, it allocates funds from this tax revenue to social welfare schemes and provides subsidies on essential goods and services that primarily benefit the lower-income groups. This combination of taxing the rich and spending on the poor helps to create a more equitable distribution of income.
7. Why is a large fiscal deficit often considered a cause for concern for an economy?
A large fiscal deficit is a major concern because it indicates a significant shortfall in government finances that must be met through borrowing. This can lead to several negative consequences:
- Debt Trap: The government has to borrow to make interest payments on past loans, leading to a vicious cycle of debt.
- Inflation: To finance the deficit, the government may borrow from the central bank, which can increase the money supply and lead to inflationary pressure.
- Crowding Out: Heavy government borrowing from the market can reduce the pool of available credit for private investors, pushing up interest rates and discouraging private investment.
- Future Burden: The debt accumulated today must be paid by future generations, placing a financial burden on them.
8. Can an economy have a fiscal deficit even if there is no revenue deficit? Explain how.
Yes, it is possible for an economy to have a fiscal deficit without a revenue deficit. This situation occurs when the government's revenue receipts are greater than or equal to its revenue expenditure, resulting in a revenue surplus or a balanced revenue budget. However, if the government's capital expenditure (e.g., for building infrastructure like highways and ports) is substantial, its total expenditure can still exceed its total receipts (excluding borrowings), leading to a fiscal deficit. Such a scenario is often viewed positively as it implies borrowing is being used for creating productive assets rather than for consumption.
9. How does government capital expenditure, such as building a new metro line, impact a country's GDP?
Government capital expenditure on projects like a new metro line has a multiplier effect on the Gross Domestic Product (GDP). Firstly, it directly increases GDP by creating demand for construction materials and generating employment. Secondly, the wages earned by workers increase their purchasing power, leading to higher consumption and further boosting demand. Finally, the completed metro line improves connectivity and logistical efficiency, which reduces business costs, attracts private investment, and enhances the economy's overall productive capacity, leading to long-term GDP growth.
