Definition and Nature of Partnership class 12 Accountancy CBSE Board

What is the Definition of Partnership as per Class 12

Here is the simplest definition of partnership according to the syllabus of class 12 CBSE, ISC, State Board.

Definition of Partnership

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The partnership is defined in Section – 4 of the Indian Partnership Act, of 1932 as follows:-

“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”

In other words, Partnership is a Business relationship between two or more persons to share profits of the business, carried on by all or any one of them acting for all.

Note:- It is only necessary to share the profits of a business to be a partner. Loss share is not mandatory.

Who are the Partners

The persons who have entered into partnership agreement individually are called partner

For example:- A, B, and C entered into a partnership agreement to start a partnership Business. Individually A B and C are called partners.

What is a Partnership Firm?

All partners who have entered into a partnership agreement to start a partnership business are called Partnership Firms.

For Example:- A, B, and C entered into a partnership agreement to start a partnership Business. Collectively A, B, and C would be called a Firm.

What is a Firm Name?

The name under which a Business is Carried is called Firm Name.

For Example:- A B and C start a shoe business forming a partnership firm name ‘Livsstil Shoes’. Livsstil Shoes is the Firm name.

Nature of Partnership

There are two points of view.

Business point of view:-

According to the Business point of view, a Partnership Firm is a separate entity from its partners.

It means all Business transactions are recorded from the business point of view.

Note:- As per the Accounting Entity or Business Entity Principle

Legal Point of View:-

From a legal point of view, a Partnership Firm is not a separate legal entity from its partners.

In case of any fraudulent activity by the firm, legal action would be taken against partners, not against the firm.

Practice Questions:-

According to the Indian Partnership Act, 1932, a partnership is based on an agreement to:

(A) Share ownership of assets
(B) Divide management responsibilities equally
(C) Share profits of a business
(D) Operate independently within a joint framework

Ans:- (c)

In a partnership, business activities may be conducted by:

A) Only the managing partner
B) A single partner acting on behalf of all partners
C) A government-appointed trustee
D) A financial institution overseeing the firm

Ans:- (b)

What is the minimum number of persons required to form a partnership under the Indian Partnership Act, 1932?

A) One
B) Two
C) Three
D) Five

Ans:- (b)

Which of the following best describes the essence of a partnership as per the Indian Partnership Act, 1932?

(A) A legal relationship requiring registration
(B) A contractual relation based on profit-sharing
(C) A state-controlled business entity
(D) A business model regulated under company laws

Ans:- (b)

Ravi and Arjun start a business together. They agree that Ravi will manage operations while Arjun will provide financial backing. Their agreement states that only Ravi will bear any losses, while both will share the profits equally. Based on the Indian Partnership Act, 1932, which statement is correct?

A) Ravi and Arjun are not partners because losses are not shared equally.
B) Ravi and Arjun qualify as partners because they have agreed to share profits.
C) Ravi is the sole owner since he bears the losses.
D) The business must register as a company to be valid.

Ans:- (b)

Meera and Sohail jointly operate an event management firm. Their partnership agreement specifies that Sohail will receive 70% of the profits, while Meera will receive 30%. However, it states that Meera will not contribute to covering losses, which Sohail alone will bear. Under the Indian Partnership Act, 1932, how does this arrangement impact their partnership status?

(A) Meera cannot be considered a partner since she does not share the losses.
(B) Sohail must formally register the firm as a sole proprietorship.
(C) Meera remains a partner because she shares the profits, despite not sharing the losses.
(D) Their agreement is invalid under partnership law.

Ans:- (c)

Rahul, Meena, and Arjun start a restaurant together. They agree to share the profits and manage different aspects of the business. Individually, what are Rahul, Meena, and Arjun called under the Indian Partnership Act, 1932?

(A) Shareholders
(B) Partners
(C) Directors
(D) Employees

Ans:- (b)

Priya and Vikram open a consulting firm. Priya handles client relations, while Vikram manages operations. Their agreement states they will share profits but work independently. According to the Indian Partnership Act, 1932, which statement is true?

(A) Priya and Vikram are partners since they have entered into a partnership agreement.
(B) Priya is an employee, and Vikram is the sole owner.
(C) They must register as a private limited company.
(D) Since they do not operate jointly, they are not partners.

Ans:- (a)

Amit, Rakesh, and Seema jointly own a textile business. Amit provides investment, Rakesh manages production, and Seema handles marketing. Under partnership law, which statement correctly identifies their legal status?

(a) They are independent contractors working for a joint venture.
(b) They are partners, as they have agreed to share profits and manage the business together
(c) Only Amit is a partner since he provides financial backing.
(d) Rakesh and Seema are employees under Amit’s ownership

Ans:- (b)

Neha and Suresh start an online tutoring platform. Suresh funds the venture, while Neha conducts the tutoring sessions. They have a formal agreement to split profits equally. Which legal term applies to Neha and Suresh under the Indian Partnership Act, 1932?

A) Business collaborators
B) Partners
C) Directors
D) Sole proprietors

Ans:- (b)

Amit, Rahul, and Sneha start a bakery business under the name Sweet Crumbs.” According to partnership law, what does “Sweet Crumbs” represent?

(A) Trademark
(B) Business License
(C) Firm Name
(D) Partnership Agreement

Ans:- (c)

Meera and Priyansh establish a clothing business and decide to operate under the name “Elite Fashion.” As per the Indian Partnership Act, 1932, why is “Elite Fashion” important in their partnership?

(A) It legally binds them to pay corporate tax.
(B) It is their brand identity under which they conduct business.
(C) It determines how profits will be distributed.
(D) It replaces the need for a partnership agreement.

Ans:- (b)

Amit and Raj establish a trading firm, “AR Traders.” From the business point of view, how should transactions be recorded in their firm’s accounts?

(A) As personal expenses of Amit and Raj
(B) Separately under the firm’s name, treating it as an independent entity
(C) Only in Amit’s financial records since he manages the transactions
(D) As mixed transactions under both personal and business records

Ans:- (b)

Meera and Sohail run a partnership firm, “MS Consultants.” Due to financial mismanagement, the firm is unable to pay its debts. From a legal point of view, who is responsible for the liability?

A) Only the firm “MS Consultants”
B) The government will settle the debts
C) Meera and Sohail, since the firm is not a separate legal entity from its partners
D) The firm’s employees, as they handle financial transactions

Ans:- (c)

Ravi and Priya form “RP Enterprises,” a partnership firm selling electronics. As per the Business Entity Principle, how should their profits be recorded?

(A) Under their individual personal accounts
(B) Recorded under “RP Enterprises” as an independent business entity
(C) Split directly into their savings accounts without recording in business books
(D) Considered government revenue since it involves sales

Ans:- (b)

Karan and Suman operate “KS Legal Advisors,” a partnership firm. If the firm is involved in fraudulent activity, who will face legal action?

(A) The firm “KS Legal Advisors” as a separate legal entity
(B) Karan and Suman personally, as they are legally responsible for firm-related misconduct
(C) Only Karan, since he manages client interactions
(D) The suppliers working with KS Legal Advisors

Ans:- (b)

Neha and Arjun run a marketing agency, “NA Solutions.” According to accounting principles, how should expenses incurred for client projects be recorded?

(A) As personal expenses in Neha and Arjun’s accounts
(B) Under “NA Solutions” as a separate business entity
(C) Divided equally between Neha and Arjun without using business records
(D) Deducted from client payments before recording any expenses

Ans:- (b)

A, B, and C run a Bag Manufacturing company Named ABC Enterprises. the Firm cheated a vendor. The vendor now wants to take legal action. Whom he would register FIR against for fraud.

a) ABC enterprises
b) Partner B
c) All Partners
d) Partners A and C

Ans:- c)

A, B, and C run a Bag Manufacturing company Named ABC Enterprises. Partner B cheated a vendor. The vendor now wants to take legal action. Whom he would register FIR against for fraud.

a) ABC enterprises
b) Partner B
c) All Partners
d) Partner A and C

Ans:- c)
The Legal existence of partners and the partnership firm is the same. Thus legal action would be taken against all partners.

Under which section of the Indian Partnership Act, 1932 the definition of the partnership is mentioned.

(a) Section – 2
(b) Section – 4
(c) Section – 6
(d) Section – 11

Ans:- b)
the definition of the partnership is mentioned under section 4 of the indian partnership Act, 1932.

As per which Accounting principle the all transactions are recorded with business point of view in a partnership firm.

(a) Full Disclosure Principle
(b) Business Entity Principle
(c) Accounting Entity Principle
(d) Historical cost Principle

Ans:- b, c)

Assertion (A): A partnership is formed when two or more persons agree to share the profits of a business.

Reason (R): As per Section 4 of the Indian Partnership Act, 1932, it is necessary to share both profits and losses to be considered a partner.