Compound Partnership

Each one of us buys products from someplace or another. The product can be anything. From luxury items to items of daily use. These products are produced by a company but sold by a sole proprietor. Our one can even purchase items from a company directly. Or one can also buy a product from a partnership business. Partnership business is the most common type of business and many infamous partnership businesses have grown to be successful. Google, Hewlett Packard, and Apple are some of the infamous partnership businesses.

What is a compound partnership?

A partnership business is a type of business where two people come together and agree to form an agreement where they decide to divide the revenue which the business will earn. The partners also decided to bring in capital and manage the work of maintaining the business. The compound partnership is a type of partnership where the partners who are running the business decide to put in capital for different periods.

For instance, there are two partners X and Y who are willing to invest an amount of ‘a’ and ‘b’ each. Let partner X be an active partner within the partnership for a given time of X and similarly, let partner Y be an active partner within the partnership business for the time of y. Therefore, the formula to calculate the profit-sharing ratio is (X’s profit share)/(Y’s profit share) = a(x)/b(y).

Some examples of problems regarding compound partnership

Example 1

Karan and Arjun plan to establish a partnership where their individual investments are 10000 and 5000 respectively, now, Karan takes the partnership forward for only 3 months while Arjun stays in for a year, given the situation that the partnership was formed for a year, determine the ratio of their profits.

1. 2: 1             B) 3: 2                   C) 2: 3                      D) 1: 2

Answer: According to the question, the initial investments of Abhijit and Karan are in the ratio 2:1. After applying the formula for the compound partnerships, we can calculate the profit-sharing ratio

(Karan profit share)/(Arjun’s profit share) = (10000×3)/(5000×12); where 12 denotes months in a year. Therefore, the ratio of the profits is (Abhijit’s profit share)/ (Karan’s profit share) = ½ or 1:2. Therefore the ratio is D) 1: 2.

Another example is given below

Example 2

Karan and Arjun invest Rs 84,000 and Rs 28,000 in a business respectively, the firm works for 2 consecutive years, in this case, the ratio of the profit of the partners are:

1. 2 : 3              B) 3 : 1                  C) 13 : 3                  D) None of these

Answer: Here, application of the formula of simple partnership is required where (Profit of A)/(Profit of B) = x/y.

Karan’s profit share = x where x and y are investments. Abhijit’s profit share = y. Therefore, we can write:

X:y = Karan’s profit share: Arjun’s profit share

Hence, (Karan’s profit share)/ (Arjun’s profit share) = Rs. 84000/Rs. 28000 = 3 : 1

The revenue earned after 2 years will be divided between Karan and Arjun in the ratio of 3: 1.

Example 3

Assuming by the example given above, the total profit of the firm is Rs 20000, determine the profits of Karan and Arjun.

Answer: As the profit has to be divided in the ratio 3:1, the profit will be divided into 4 shares i.e. 3 + 1. Therefore, we can write 20000/4 = 5000. Thus, the profit of Karan = 5000×3 = Rs. 15000.

Similarly, the profit earned by Arjun = 5000×1 = Rs. 50000.

Conclusion

The compound partnership is an important part of academics and students are expected to solve the compound partnership problems. There is numerous compound partnership problems pdf available on the internet that contains compound partnership questions. Compound partnership problems can be solved using the respective formula and therefore it can be easy to secure marks by solving the compound partnership problems.