Question

How can partnership profits be distributed? If you and two friends were to organize a partnership, how would you want your profits to be distributed? Explain.

Answer 1

Partnership is the result of an agreement between two or more persons who voluntarily agree to pool the resources to do a lawful business and to share profits and losses there from an agreed proportion

All partnerships are formed out of an agreement between the partners . The agreement may be oral or in writing when the agreement is in writing it is called the partnership deed or articles of partnership thus, partnership deed is a document which contains the important terms and conditions of the partnership including the profit sharing ratio as agreed by the partners.

One of the most important objective of the agreement of partnership business is to share the profit. The profit of the partnership business must be shared by all the partners in an agreed ratio. In case of loss should also be shared by them in the same ratio. In the absence of Partnership deed, profit or loss should be shared equally. The ratio may be specified in terms of absolute value or it may be expressed as the ratio of their capital account balances or it may be based on anything else as agreed by the partners.

Following are the methods of sharing profits and losses in partnership firms

1) Sharing profits and losses equally

2) Sharing profits and losses based on the capital contributed by each partner

3) Sharing profit and losses based on a ratio agreed by all partners

In the absence of partnership deed the profits and losses of the firm share equally

If you have any doubts, please comment. thank you