The ratio in which the continuing partners have acquired the share from the retiring or deceased partner, is called:

Question

Accepted Answer

The correct option is 4:
The Gaining Ratio, also known as the Benefit Ratio, is the correct term for the proportion in which the remaining partners acquire the outgoing share of profit from a retiring or deceased partner. When a partner leaves a firm, their share of future profits is logically distributed among the continuing partners, which results in a 'gain' for them. The Gaining Ratio is calculated as the New Profit Sharing Ratio minus the Old Profit Sharing Ratio for each continuing partner. This ratio is critically important in partnership accounting because it determines the exact proportion in which the continuing partners must compensate the retiring or deceased partner for their share of the firm's goodwill. In essence, it measures the increase in the share of profits for the remaining partners, which serves as the precise basis for allocating the necessary adjustment for goodwill.

The incorrect option is 1:
The Debt-equity Ratio is a long-term solvency ratio, a key component of financial statement analysis. It is calculated by dividing a firm's total external debt by its shareholders' funds (equity). This ratio's primary function is to assess the risk associated with the long-term financial health of the business by measuring the proportion of external, borrowed funds (debt) to internal, owned funds (equity). It is a measure of capital structure and leverage and therefore has no direct connection to the accounting adjustments required in a partnership upon the retirement or death of a partner.

The incorrect option is 2:
The Liquidity Ratio, often referring to the Acid-Test Ratio or Quick Ratio, is a critical short-term financial analysis tool. It measures a firm's ability to meet its immediate, or short-term, obligations using its most liquid or 'quick' assets (excluding inventory and prepaid expenses). While important for assessing short-run financial stability, this ratio is part of the overall financial performance assessment for the firm. It relates to the firm's cash position and ability to pay current liabilities promptly and is completely unrelated to the recalculation of profit-sharing among partners in a reconstituted partnership.

The incorrect option is 3:
The Current Ratio is another fundamental measure of a company's short-term liquidity, calculated as Current Assets divided by Current Liabilities. Its purpose is to indicate the firm's ability to cover its short-term debts using assets that are expected to be converted into cash within one year. Like the other financial ratios listed, it is a tool for financial analysis that judges the firm's solvency and operational risk profile. It is a concept in financial accounting that plays no role whatsoever in the specific adjustments, such as goodwill treatment, that follow a partner's retirement or death.