When two or more persons make an association and invest money for running a certain business and after certain time receive profit in the ratio of their invested money and time period of investment, then such an association is called partnership and the person involved in the partnership are called partners.
Ratio of Divisions of Gains
(I) 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.
Suppose 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.
(II) 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.
Partnership is of Two Types
If all partners invest their different capitals (money) for the same time period or same capital for different time period then their profit or loss is in the ratio of their investments or time period of investment then such a partnership is called simple partnership.
If all partners invest their different capitals (money) for different time period, then their profit not only depends on their investment but also on the time period of their investment, then such a partnership is called compound partnership.
Partners are of Two Types
Active or Working Partner
A partner who not only invests money, but also take part in the business activities for which he draws a defined salary or gets some share from profit before its division is called an active partner.
A partner who only invests money and does not take part in business activities is called sleeping partner.