Partnership Firms Explained: Key Features, Partnership Deed & Profit Sharing — CBSE Class 12 & CA Foundation

Partnership is one of the highest-scoring chapters in CBSE Class 12 Accountancy — and one of the most foundational topics for CA Foundation. Get the basics right here, and the more complex problems in admission, retirement, and dissolution become significantly easier.

5 Essential Features of a Partnership

1. Two or More Persons

A minimum of two partners is required. The maximum is:

• 50 partners for most businesses
• 20 partners for banking businesses

2. Written Agreement

A partnership deed is not legally mandatory, but it is strongly recommended. Without one, disputes are settled by the default provisions of the Partnership Act — which may not reflect what the partners actually intended.

3. Lawful Business

The business activity must be legal. A partnership formed for an illegal purpose has no legal standing.

4. Profit Sharing

Partners must agree to share both profits and losses in a defined ratio. A person who only shares in profits but not losses is not legally a partner.

5. Mutual Agency

This is the most distinctive feature. Each partner is simultaneously:

• An agent of the firm (can bind the partnership through their actions)
• A principal (is bound by the actions of other partners)

This is why trust between partners is essential — every partner's decisions carry legal weight for the entire firm.

The Partnership Deed

The partnership deed is the governing document of the firm — think of it as the firm's constitution. It typically contains:

Critical Rule: The provisions of the partnership deed override the provisions of the Partnership Act. The Act only applies where the deed is silent.

Profit-Sharing Ratio (PSR): What You Must Know

The profit-sharing ratio determines how profits — and losses — are divided at the end of each accounting period.

Key Rules

• PSR is set by the partnership agreement
• It does not need to be proportional to capital contribution — a partner who contributes less capital can still receive a larger profit share if agreed
• Changes to PSR require consent of all partners
• If the deed is silent on PSR, the Partnership Act requires profits to be shared equally — regardless of how much capital each partner contributed

Exam alert: "Equally" means each partner gets the same share — not a share proportional to their capital. This catches many students out.

Guarantee of Minimum Profit

A partnership deed can guarantee one partner a minimum profit share. This means:

• The partner is assured of at least a specified amount, regardless of actual profit
• If their normal share falls short, the shortfall is borne by the other partners — in their agreed ratio or PSR

Example:

Partner A is guaranteed ₹50,000. Actual profit share = ₹40,000.

Shortfall = ₹10,000, borne by the other partners in their agreed ratio.

Board Exam Focus

For CBSE Class 12, this section typically appears as:

• Short-answer questions on features and the deed
• Journal entries for guarantee situations
• Introductory questions before capital account problems

For CA Foundation, be ready to identify which provisions apply when the deed is silent, and to apply the Partnership Act's defaults correctly.

What's Next?

In Part 2, we cover the most commonly confused topic in this chapter: Fixed Capital vs Fluctuating Capital methods — with clear worked examples showing exactly what gets recorded where, and how to identify the method from a question's wording.