Introduction to Partnership Firm for Himachal Pradesh PSC 2020

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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’.

Image of Partnership

Image of Partnership

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Why was a “Partnership” needed at all?

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Image of Partnership

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  • 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

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Image of Essentials of a Partnership

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  • 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

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Image of Types of Partners

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