Partnership Business

When two or more persons agree to form an organization and run a business jointly, then such a business is called a partnership business. There are certain costs associated with any kind of business. So, a certain amount a money is required to start a business. This sum of money which is invested in the business is called capital. In a partnership business, each of the partners invests a certain sum of money, i.e. a part of the capital, to run the business.

Principles of Partnership Business:

There are certain principles on which a partnership business is set-up:

1. Capital: The business partners may invest an equal sum of money individually or their contributions towards the total capital required may bear a simple ratio to each other.

For example, Ashok and Rajesh start a partnership business for which they need capital of Rs 10,000. Now, Ashok and Rajesh may agree to invest Rs. 5,000 each or Ashok may invest Rs. 7000 and Rajesh may invest Rs. 3000. In this case their contributions bear the simple ratio of 7:3.

2. Share of Profits: A mutual agreement is reached before starting the business on how the profits or losses will be distributed among the partners. The profits or losses will be either shared equally by the partners or on the basis of the terms mentioned in the initial mutual agreement, whatever those terms maybe. However, if nothing is mentioned clearly in the initial mutual agreement, then the profits or losses are divided among the partners in the ratio of their capital investments.

Let us go back to the previous example of Ashok and Rajesh. Here we take it to be given that Ashok and Rajesh’s capital investments were in the ration 7:3. Let us assume, after a month of business, there is a profit of Rs. 100. In this case, if nothing is mentioned, the profit will be divided among Ashok and Rajesh in the ratio 7:3.

Ashok’s share of profits

Rajesh’s share of profits

Note: We calculated Rajesh’s share in the same way simple for explanatory purposes. Since, only two partners are involved here, after finding out the share of any one partner we could have simply subtracted that from the total profit to get the share of the other partner, i.e. Rajesh’s share could have been found out simply by subtracting Rs. 70 from Rs. 100 which would have given the same answer, i.e. Rs. 30.

Types of Partnership Business:

There are two types of partnership business:

1. Simple Partnership Business:

When the capitals of all the partners are invested for the same period of time it is called simple partnership business.

Example:

Suppose three persons A, B and C are partners in a business and A has a capital of Rs. 3000 in the business, B has Rs. 5000 and C has Rs. 6000.

So, if nothing is mentioned, the profits from this business should be shared among A, B and C in the following ratio:

Rs. 3000:Rs. 5000:Rs. 6000=3:5:6, where A will get or part of the profit, B will get or part of the profit and C will get or part of the profit.

Here, since nothing is specifically mentioned, it is assumed that the capitals of the three partners are invested in the business for the same period of time.

2. Compound Partnership Business:

When the capitals of partners are invested for different periods of time, then such a business is called a compound partnership business.

Example:

Suppose three persons A, B and C are partners in a business and A has a capital of Rs. 3000 invested in the business for 3 months, B has a capital of Rs. 5000 for 6 months and C has a capital of Rs. 6000 for 7 months.

Now, for A, a capital of Rs. 3000 invested for 3 months may be taken to be equivalent to a capital of for 1 month.

Now, for B, a capital of Rs. 5000 invested for 6 months may be taken to be equivalent to a capital of for 1 month.

Now, for C, a capital of Rs. 6000 invested for 7 months may be taken to be equivalent to a capital of for 1 month.

So, in this case, if nothing is mentioned, the profits from this business should be shared among A, B and C in the following ratio:

Rs. 9000: Rs 30000: Rs. 42000=9:30:42=3:10:14 where A will get or part of the profit, B will get or part of the profit and C will get or part of the profit.

Example: A, B, C, and D started a partnership business with capitals of Rs. 15,000, Rs. 21,000, Rs. 30,000 and Rs. 45,000 respectively. The following conditions were mutually agreed upon before starting the business.

(i) A and B will manage the business and as a fee for their services of managing the business, they will divide 0.25 part of the total profit equally between themselves.

(ii) The remaining profit will be divided  among the four of the partners in the ratio of their invested capitals.

If the annual profit was Rs. 27,232, find the share of each partner. 

Solution:

According to condition (i) 0.25 part of the profit, i.e. 0.25 part of Rs. 27,232= Rs. 6808 will be divided equally among A and B.

Now, the remaining profit= Rs. 27,232 -Rs. 6808= Rs.  20,424 will be divided among the four members in the ratio of their invested capitals.

Ratio of the invested capital’s of A, B, C and D is as follows:

A:B:C:D=Rs. 15,000:Rs. 21,000:Rs. 30,000:Rs. 45,000=5:7:10:15

$\therefore $ A’s share from the remaining profit

$\therefore $ B’s share from the remaining profit

$\therefore $ C’s share from the remaining profit

$\therefore $ Ds share from the remaining profit

Apart from this, A and B will each get and additional for managing the business.

Exercise:

1. Three friends Abhinav, Uttam and Jaffar entered into a partnership business by investing Rs 10,000, Rs 12,000 and Rs 11,000 respectively. After a year, there was a profit of Rs 99,000. If the profit was divided among them in the ratio of their capitals, find the share of each.

2. A, B and C go into business as partners and collect a profit of Rs. 1000. If A’s capital : B’s capital=2:3 and B’s capital : C’s capital=2:5, find the shares of profit which go to each of them.

Hint: A’s capital:B’s capital

B’s capital : C’s capital

A’s capital:B’s capital:C’s capital

3. A, B and C start a partnership business on 1st January with capitals of rs. 50,000, Rs. 60,000 and Rs. 70,000 respectively. On 1st April, B invested Rs. 10,000 more but on 1st June C withdrew Rs. 10,000. The total profit on 31st December was Rs. 39,240. Find the share of each on the basis of the ratio of their capitals.

Hint: A has invested Rs. 50,000 for 12 months.

B has invested Rs. 60,000 for 3 months(1st January to 31st March) and Rs. (60,000+ 10,000) or Rs. 70,000 for the remaining 9 months(1st April to 31st December).

C has invested Rs. 70,000 for 5 months (1st Jan to 31st May) and Rs. (70,000-10,000) or Rs. 60,000 for the remaining 7 months (!st June to 31st December).

4. Two friends+ started a partnership business with capitals of Rs. 25,000 and Rs. 35,000 respectively. They had the following agreement (i) of the total profit will be equally divided among them (ii) The remaining profit will be divided in the  ratio of their equivalent capitals. If the profit at the end of the year is Rs. 36,000, find the hare of each.