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Partnership Accounts

Subject: Accounting
Topic: 9
Cambridge Code: 0452 / 0985 / 7707

Introduction to Partnerships​

Partnership - Business owned and managed by two or more people

Features of Partnership​

  1. Two or more partners
  2. Jointly responsible for business
  3. Generally unlimited liability
  4. Partnership Deed outlines agreement
  5. Partners share profits and losses
  6. Death or retirement of partner affects partnership

Advantages​

  • More capital available
  • Shared workload
  • Combined expertise
  • Easier to borrow

Disadvantages​

  • Shared profits
  • Unlimited liability
  • Disagreements between partners
  • Death/retirement dissolves partnership

Partnership Deed​

Partnership Deed - Agreement between partners covering:

  1. Profit/Loss Share - How profits/losses divided
  2. Interest on Capital - Return on capital invested
  3. Partner Salaries - Drawing or salary paid
  4. Interest on Drawings - Charged on amounts withdrawn
  5. Goodwill - Value of reputation/relationships
  6. Admission/Retirement - Conditions for changes

Capital Accounts and Current Accounts​

Capital Accounts​

Purpose:

  • Record partners' original and additional investments
  • Keep track of permanent capital

Characteristics:

  • Usually not changing
  • Only credited with additional investments
  • Only debited with permanent capital withdrawals
  • Shows partners' equity contribution

Format:

Partner APartner B
Opening Balance10,0008,000
Add: Additional Investment2,0000
Less: Capital Withdrawn(0)(1,000)
Closing Balance12,0007,000

Current Accounts​

Purpose:

  • Record share of profit/loss
  • Record drawings
  • Record interest on capital/drawings
  • Record salaries

Characteristics:

  • Fluctuate throughout year
  • Credited with profit share, salaries, interest on capital
  • Debited with drawings, interest on drawings
  • Shows current year transactions

Format:

Partner APartner B
Opening Balance5,0003,000
Profile/Loss Share12,0008,000
Add: Interest on Capital600480
Add: Salary02,000
Less: Drawings(8,000)(6,000)
Less: Interest on Drawings(200)(150)
Closing Balance9,4007,330

Distribution of Profit​

Order of Distribution (from Partnership Deed)​

  1. Salaries - Paid to partners (if agreed)
  2. Interest on Capital - Return on capital invested
  3. Interest on Drawings - Charged against profit
  4. Remaining Profit/Loss - Shared in profit-sharing ratio

Worked Example​

Partnership Information:

  • Profit before appropriations: $20,000
  • Partner A salary: $5,000
  • Partner B salary: $3,000
  • Interest on capital at 10%
    • Partner A capital: $30,000
    • Partner B capital: $20,000
  • Profit sharing ratio: 3:2

Calculation:

Step 1: Salaries

  • Partner A: $5,000
  • Partner B: $3,000
  • Total: $8,000
  • Remaining: 20,000−20,000 - 8,000 = $12,000

Step 2: Interest on Capital

  • Partner A: 30,000×1030,000 × 10% = 3,000
  • Partner B: 20,000×1020,000 × 10% = 2,000
  • Total: $5,000
  • Remaining: 12,000−12,000 - 5,000 = $7,000

Step 3: Share Profit 3:2

  • Partner A: 7,000×3/5=7,000 × 3/5 = 4,200
  • Partner B: 7,000×2/5=7,000 × 2/5 = 2,800

Total Profit Distribution:

Partner APartner BTotal
Salary5,0003,0008,000
Interest on Capital3,0002,0005,000
Profit Share (3:2)4,2002,8007,000
Total12,2007,80020,000

Partnership Appropriation Account​

Appropriation Account - Shows how partnership profit is distributed among partners

Format​

Partnership Appropriation Account for Year ended 31 December 2024

$$
Net Profit from P&L20,000
Less: Salary - Partner A(5,000)
Less: Salary - Partner B(3,000)
Less: Interest on Capital - A(3,000)
Less: Interest on Capital - B(2,000)
(13,000)
Profit Available7,000
Divided in Profit Share Ratio:
Partner A (3/5)(4,200)
Partner B (2/5)(2,800)
(7,000)
Balance0

Partnership Balance Sheet​

Balance Sheet as at 31 December 2024

$$
Non-Current AssetsXXX
Current AssetsXXX
Total AssetsXXX
Liabilities
Current Liabilities(XXX)
Capital Accounts:
Partner A30,000
Partner B20,000
50,000
Current Accounts:
Partner A9,400
Partner B7,330
16,730
Total Capital & LiabilitiesXXX

Interest on Drawings​

Interest on Drawings - Charged to partners on amounts withdrawn

Calculation​

Interest=Drawings×Rate×Months12\text{Interest} = \text{Drawings} \times \text{Rate} \times \frac{\text{Months}}{12}

Example​

Partner A drew $500 per month for 12 months Interest rate: 8%

Interest=(500×12)×8%×1212\text{Interest} = (500 \times 12) \times 8\% \times \frac{12}{12} =6,000×8%=480= 6,000 \times 8\% = 480

Journal Entry​

DebitCredit
Current Account - Partner A480
Appropriation Account

Key Points to Remember​

  1. Partnership needs a deed
  2. Capital accounts for permanent capital
  3. Current accounts for yearly movements
  4. Profit distributed in order: salary, interest on capital, profit share
  5. Interest on capital based on opening capital
  6. Interest on drawings charged to partners
  7. Appropriation account shows distribution

Practice Questions​

  1. Partnership has profit of 30,000.PartnerA(3/5)salary30,000. Partner A (3/5) salary 6,000, interest on capital (10%) 3,000.PartnerB(2/5)salary3,000. Partner B (2/5) salary 4,000, interest $2,000. Calculate distribution.

  2. Partner drew $2,000 monthly. Interest rate 5%. Calculate interest on drawings.

  3. Prepare current accounts given opening balance, salaries, interest, profit share, and drawings.

Revision Tips​

  • Learn the order of profit distribution
  • Understand difference between capital and current accounts
  • Practice profit distribution calculations
  • Know how to prepare appropriation accounts
  • Understand interest on capital vs. drawings