1. Basis of Profit Sharing

Profit sharing in a partnership firm is primarily governed by the partnership agreement.

• The profit-sharing ratio is defined in the partnership deed.
  
• It is decided mutually by all partners at the time of formation.
  
• Partners may agree to share profits equally or unequally.
  
• The ratio may depend on capital contribution or active involvement.
  
• If no specific ratio is mentioned, profits are shared equally by law.

2. Role of the Partnership Deed

The partnership deed is a critical document that outlines financial arrangements.

• It clearly states each partner’s share in profit and loss.
  
• It may also mention interest on capital and remuneration, if any.
  
• The deed prevents disputes by establishing clear terms.
  
• It must be signed by all partners for legal validity.
  
• In the absence of a deed, the default provisions of law apply.

3. Sharing of Losses

Losses are typically shared in the same ratio as profits unless agreed otherwise.

• Partners must bear losses as per the agreed terms.
  
• If the deed is silent, losses are shared equally.
  
• Personal liability applies to all partners for losses.
  
• Loss sharing discourages reckless business decisions.
  
• Partners may negotiate specific loss-sharing clauses.

4. Adjustments Before Profit Distribution

Certain financial adjustments are made before final profit sharing.

• Expenses, salaries, and interest are deducted from gross profit.
  
• Net profit is calculated after these deductions.
  
• Partners’ capital accounts are credited with their respective shares.
  
• Adjustments also include prior period settlements, if any.
  
• These ensure accurate distribution and maintain fairness.

5. Flexibility and Mutual Agreement

Profit sharing can be revised through mutual consent at any stage.

• Partners can alter the ratio by amending the deed.
  
• Changes require unanimous agreement from all partners.
  
• Adjustments may be temporary or permanent based on business needs.
  
• Profit ratios can also be tied to performance metrics.
  
• Flexibility in profit sharing fosters trust and cooperation.