Introduction to Partnership Firm for CS Exam 2022

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Introduction to Partnership Firm: Accounting Commerce - (Commerce)

  • Partnership is one of the important forms of business organisations.
    • It is an association of two or more persons
    • competent to enter into a contract, making agreements,
    • contribute capital,
    • undertaking a lawful business for earning profit and
    • sharing the same in an agreed proportion.
  • Partnership is a trading organisation, which results from a contract and hence is governed by the Indian Partnership Act, 1932 as well as the Indian Contract Act, 1872.
  • When two or more persons come together to carry on a business with a view to share profits or losses, such a relationship is called as ‘Partnership’ .

Why was a “Partnership” needed at all?

  • Sole proprietorship suffers from limited resources, hasty decisions and temporary existence etc. As remedy, partnership emerged as a form of business organization.
  • It is an extension of a sole proprietorship. It is better than sole proprietorship because in sole proprietorship the business is carried out by the individual with limited capital and limited skill.
  • Due to the limited resources of a single individual carrying a sole proprietorship, a larger business requiring more resources and investment than available to the sole proprietor cannot be thought of such business.
  • On the other hand, in partnership, a number of partners join together with their capital to form an agreement and carry out a business jointly.

Definition of Partnership Firm

According to Section 4 of the Partnership Act, 1932 -

  • “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all” .
  • Prof. Haney defines partnership as, “the relation existing between persons competent to make contract who agree to carry on a lawful business in common with a view to earn private gain.”


  • A and B buy 100 tons of oil which they agree to sell for their joint account.
  • This forms a partnership and A and B are considered as partners.
  • A and B buy 100 tons of oil and agreed to share it among them.
  • It does not form a partnership as they have no intention to carry out business.

Essentials of a Partnership

Essentials of a Partnership
  • There must exist an agreement between the partners.
  • The motive is to earn the profit and share between the partners.
  • The agreement must be to carry out the business jointly or by any of them acting on the behalf of all.

Types of Partners

Types of Partners