Partnership

The concept of simple partnership and compound partnership are two types of partnership. These two concepts are different from each other because of the period of their investment. This is done to simplify the process of identifying profit based on the investments. By the end of this guide, an analysis about partnership will be acquired with practical examples.  

What is the definition of partnership?

Partnership is a branch of mathematics, which holds paramount significance as it is easily used in business simultaneously. In case, when two or more than two persons join in a business, they are called partners and the act of joining is called partnership. In partnership, when partners of a business resume their partnership at the same time, the profit or loss is distributed among the partners as per the ratio of their investment. There are two types of partnership that are practised in India, which are simple partnership and compound partnership. A simple partnership can be observed when all the partners join at the same time and continue their partnership throughout the entire tenure. Simple partnership implies that the profit will be distributed among the partners as per their initial investment. One significant aspect of simple partnership is that when the profit of one partner is calculated, the profits of other partners can be easily explained. On the other hand, compound partnership can be witnessed in cases when the partners invest their capital for varying times. As a result, their gain or loss from the business are not calculated based on the entire tenure, rather their profits are calculated only based upon their time of investment.

Explanation of the partnership formula 

The partnership formula is important to figure out the exact amount of profit or loss gained by one partner, since without it the amount cannot be calculated properly. However, despite that, the partnership formula is relatively easy to understand. For instance, let it be assumed that A and B decide to join in a partnership. They invest Rs. x and Rs. y respectively for the period of one year and no one pulls out their investment in the middle of the year. As a result, at the end of the year, they will receive the following amount.

(Share of profit for A): (Share of profit for B) = x: y

In case of investments made for different times, the profit is calculated for that partner for the specific period. For instance, let it be assumed that A invests Rs. x for p months and B invests Rs. y for q months. Thereafter, the profit at the end of the specific period will be calculated similar to the following.

(Share of profit for A): (Share of profit for B) = xp: yq

The amount of gain or loss after the specific time is calculated on the basis of this ratio and distributed among the partners.

What is the significance of partnership?

A business partnership can provide multiple benefits, some of which include greater capital, shared wisdom, collaboratively countering risks and diversification of management. As a result, business organisations in India actively remain on the lookout for partnership. Therefore, the concept of partnership holds actual significance in real life business.  The amount of profit or loss is assessed after tenure with the concept of partnership. For instance, let it be assumed that P invests Rs. 15000 for the entire year of 2020 and Q invests 20000 in a business together. At the end of the year, the profit enjoyed by both of them will be easily calculated with the help of the formula of partnership. The ratio of partnership in this context, as per the formula is 15000: 20000. As the concept of partnership can give a clear idea of the way of distributing the profit, it simplifies a complex matter easily. Therefore, the concept of partnership holds a special place in reality while conducting business transactions. One of the most important aspects of partnership is that it can even assess the amount of capital invested within a limited period of time, as businesses often include sleeping partners. 

Conclusion 

It can be summarised that a business is extremely complex with multiple partners and multiple investments. It is true that multiple partners can further enrich the business scope and with the simple concept of partnership can easily sort out the challenges presented by multiple timeframes of business partnership. Partnership is a mathematical concept that views profit to be directly proportionate to the time of investment. As a result, partnership concept and formula is mandatorily used in partnership businesses of India, while it is important to note that majority of businesses are run on partnership.