Partnership

A partnership is whenever at least two individuals hold hands with a shared objective to achieve benefits. Each accomplice contributes either time, cash or licenses to enable the association firm to harvest benefits.

A partner who only invests money is called a Sleeping Partner and a partner who invests money and mainly manages the business is called the working partner.

Types of Partnerships:

There are two types of partnership in the form of simple and compound partnerships.

Simple Partnership

In such partnerships, the resources are invested for the same time period by all the investors i.e. the capital (or other resources) stays in the business for the same duration. In this kind of partnership, the profit is distributed in proportion to their contributed resources.

Simple Partnership Formula

If P and Q contributed Rs. a and b respectively for one year in a business, their profit (or loss) at that time will be-

=> P’s benefit (or misfortune) : Q’s profit(or misfortune) = a : b

Compound Partnership

In a compound partnership, the money is invested for different periods of time by different investors. In this, the benefit-sharing proportion is ascertained by duplicating the capital contributed with the unit of time (generally months).

Compound Partnership Formula

=> P1 : P2 = C1 × T1 : C2 × T2

Here,

P1 = Partner 1’s Profit.

C1 = Partner 1’s Capital.

T1 = Time period for which Partner 1 contributed his capital.

P2 = Partner 2’s Profit.

C2 = Partner 2’s Capital.

T2 = Time period for which Partner 2 contributed his capital.

Important Formulas

1. When investments of all the partners are for the same time, the gain or loss is distributed among the partners in the ratio of their investments.

For example, A and B invest Rs. x and Rs. y respectively for a year in a business, then at the end of the year:

(A’s share of profit) : (B’s share of profit) = x : y.

2. When investments are for different time periods, then equivalent capitals are calculated for a unit of time by taking (capital x number of units of time). Now gain or loss is divided in the ratio of these capitals.

Suppose A invests Rs. x for p months and B invests Rs. y for q months then,

(A’s share of profit) : (B’s share of profit)= xp : yq.