Profit Distribution in a Partnership with Variable Investments

Introduction to Partnership and Profit Sharing

A partnership is a business entity formed by two or more individuals who agree to join their capital, skills, efforts, and money. When these partners come together, they agree to share the profit and loss in a pre-determined ratio. Understanding how to calculate the profit sharing ratio is crucial for partners to ensure fairness and transparency in the business. This article explains the process of calculating the share of a partner, C, in the annual profit of Rs. 47000 when A and B entered into a partnership with Rs. 25000 and Rs. 30000 respectively, and C joined with Rs. 35000 after 4 months. We will explore different ways to solve this problem using the concept of weighted capital ratio and/or the concept of money equivalent to time.

Method 1: Using the Weighted Capital Ratio

The first step is to calculate the weighted capital ratios for A, B, and C.

Calculation for A and B

A: 25000 for 12 months 300000 B: 30000 for 12 months 360000

Total for A and B: 300000 360000 660000

Calculation for C

C: 35000 for 8 months 280000

Total for C: 280000

Now, the total investment/months of A, B, and C is 660000 280000 940000.

Ratio of their capitals and months of investment: A: B: C 300000: 360000: 280000 15: 18: 14

C's Share of the Annual Profit

C's share of the profit is calculated as follows:

C's share (14 / 47) × 47000 Rs 14000

Method 2: Using the Money Equivalent to Time

The alternative method involves calculating the money equivalent to time for each investor, which is then used to determine the profit sharing ratio.

Calculation for A, B, and C

A: 25000 for 12 months 300000 B: 30000 for 12 months 360000 C: 35000 for 8 months 280000

Total: 300000 360000 280000 940000

Ratio of their investments equivalent to time: 25: 30: 35 5: 6: 7

C's Share of the Annual Profit

Therefore, C's share of the profit is:

C's share (7 / 18) × 47000 Rs 18277 for 12 months.

C's share for 8 months: 18277 × 8 / 12 1523 × 8 12184

Thus, the correct share of C in the annual profit is Rs 14000.

Conclusion

Calculating the share of profit in a partnership becomes straightforward when using the concepts of weighted capital ratio and money equivalent to time. The profit sharing ratio directly correlates with the investment, the duration of investment, and the time remaining in the year. In the given example, C's share of the annual profit is Rs. 14000, reflecting the proportional contribution of investment and time.

Keywords: partnership, profit sharing, weighted capital ratio