Partnership accounting

A partnership is a business owned by two or more people who agree how to share its profit. This module teaches how to divide the profit of a year between partners, record each partner’s account and check that the figures agree.

It sits within the wider IGCSE Accounting subject guide and follows sole-trader statements. Check the current Cambridge syllabus for the exact scope in your exam year, because the examples here follow the usual stated model.

Why does this topic matter?

In a sole trader’s business, all profit belongs to one owner. In a partnership, the profit must be split, and the split follows an agreement: a salary for one partner, interest on capital, interest on drawings, then a ratio for the rest.

Examiners can test any part of that chain, so each step needs a reason. The appropriation account is where the net profit is shared out, and the partners’ current accounts are where each person’s share is recorded.

What should you know first?

You should be comfortable with the net profit figure from the income statement, with double entry, and with ratios and percentages. If you can share RM48,000 in the ratio 5:3 and find 6% of RM90,000, you are ready.

An orienting example

Sari and Tan run a small bakery. Net profit for the year is RM60,000. Their agreement gives Sari a salary of RM12,000, pays 5% interest on capital (Sari RM80,000, Tan RM40,000), charges interest on drawings (Sari RM600, Tan RM400) and shares the rest in the ratio 3:2.

1. Profit available: RM60,000 + interest on drawings RM1,000 = RM61,000.
2. Salary and interest on capital: RM12,000 + RM4,000 + RM2,000 = RM18,000.
3. Residual profit: RM61,000 − RM18,000 = RM43,000.
4. Shares of the residual: RM43,000 ÷ 5 = RM8,600 a part, so Sari RM25,800 and Tan RM17,200.
5. Total for each partner: Sari RM12,000 + RM4,000 + RM25,800 − RM600 = RM41,200. Tan RM2,000 + RM17,200 − RM400 = RM18,800.

Check: RM41,200 + RM18,800 = RM60,000, which is the net profit. The appropriation moves profit between partners but never creates or loses any.

What order should you study the lessons in?

1. Allocate profit under a supplied agreement: the ratio step that every other step feeds into.
2. Distinguish capital and current accounts: where each type of entry is recorded.
3. Treat partner salary as appropriation: why a salary is shared out of profit, not deducted as an expense.
4. Record interest on drawings: charge it to the partner and credit the appropriation account.
5. Reconcile partners’ balances: prove the closing figures agree with the net profit and the drawings.

What traps catch students?

• Sharing the net profit in the ratio first and then adding salaries on top.
• Treating a partner’s salary as an expense in the income statement.
• Posting drawings to a fixed capital account instead of the current account.
• Adding interest on drawings to the partner’s account instead of charging it.
• Adding a debit current account balance as if it were a credit balance.

How should you use the practice set?

Finish the lessons, then attempt the mixed practice set on paper before opening any answer. Use the ledger trainer to check debits and credits, the percentage-base explorer for interest calculations and the mistake log to record each slip so you can retest it a few days later.

The cash versus profit bridge is a useful reminder that a share of profit is not cash paid out. If your own examples keep getting stuck at the same step, our teachers can work through them in online one-to-one Accounting tuition.