Soil erosion is one of the most important environmental problems, and it remains as a major threat to soil fertility and reservoir sedimentation in Ethiopia. Estimation of erosion and sediment yield is one of the prerequisites to install conservation and management of soil and water resources and also for many hydrological applications. The present study aims at modelling and estimating the potential soil loss and sediment yield as well as to identify the major erosion prone and sediment source areas in Gumara watershed. The Revised Universal Soil Loss Equation, with many modifications and improvements, and SDR, to a recent advancement to Ethiopian conditions were used to estimate soil loss and sediment yield of Gumara watershed spatially with GIS. GIS with its extensions, WMS and Global Mapper were used for data preparation and analysis. The result from RUSLE was compared with sediment with data generated by rating curve from the MoWIE as an observed data. The results indicated that the rate of potential soil loss in the watershed ranged from 0 to 893.46 ton/ha/year with mean of 35.83 ton/ha/yr. The annual sediment yield was also calculated as 18.28 ton/ha/year accounting a reduction factor, SDR of 50.96%. The model prediction and the rating curve data comparison provided satisfactory results indicating the modified RUSLE is promising for future predictions of water resource development engineers in the region. The wetlands in the peripheries of lake Tana was found as sediment trapping basins before all suspended sediment joins the lake from Gumara watershed, likely from the other watersheds too. As a result wetland management in addition to upland watershed management plan has to be in place to safe guard the water quality and capacity of the multipurpose lake, Lake Tana.