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## Partnerships - Concept

Questions asked from this chapter are based the sharing of profit , calculation of ratio of investments or ratio of time periods of investment .

Partnership : An association of two or more persons who invest their money together in order to carry on a certain business is known as partnership and after a certain period of time , they share the profit or loss of the business in the ratio of their investment

Persons who have entered into partnership with one another are individually called partners and collectively called a firm and the name under which their business is carried on is called the firm name .

Partnership can be classified in two types
1. Simple Partnership
2. Compound Partnership

Simple Partnership : If all the partners invest their capital for the same time period, such partnership is know as the simple partnership. In this partnership , the profit or loss of the business is distributed among the investors in the ratio of their capitals.

Example : Let three partners A,B and C invested Rs 12000, Rs 15000 and Rs 18000 respectively in a business.In the end of the year , the profit will be distributed among them in the ratio of their invested money
i.e, 12000 : 15000: 18000 or 4:5:6

Compound Partnership : If the capitals of the partners are invested for different time periods , the partnership is known as compound partnership .   In this type of partnership, profit or loss of the business is distributed in the ratio of product of their investments and time for which capital is invested

Example ; A started a business by investing Rs 40000.After 3 months B became partner by investing Rs Rs 30000. In the end of the year ,the profit is distributed between A and B in the ratio of product of time and their invested money
i.e,   40000 x 12 : 30000 x 9 or 16: 9

Partners : The persons who put their money in a business under the partnership , are known as partners. There are two types of partners.

Working Partner or Active Partner : A partner who manages the business or One who invests money as well as attends to the business is called Active Partner or Working Partner.Active partner gets salary or remuneration( in any form )for his contribution of work and effort . Active partner is also called working partner . Working partner gets salary for his contribution of work and share in the profit for his contribution of capital.

Sleeping Partner : A partner who simply invests money , but does not manage the business actively , is called the sleeping partner. Sleeping partner gets only profit as his share . Sleeping partner is also called non- working partner or silent partner.

It is advisable to have complete understanding of the chapter " Ratio and Proportion " as its concept is used extensively in this chapter

Important Points to be remembered

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.

2. When investments are for different time, 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.

Example : If the capital C1 invested for the time period T1 ,and the capital C2 is invested for the time period T2 and capital C3 is invested for the time period T3 , then

ratio of the profits = C1T1 : C2 T2 : C3T3

3.  If the capital C1 is invested for the time period T1 and capital C2 is invested for the time period T2, then $\frac{P1}{P2} =\frac{C1T1}{C2T2}$

For better understanding of the concept -PARTNERSHIPS , visit Partnerships - Solved Examples
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