What you'll learn
A partnership is a business owned by two or more people who share its profits according to an agreement between them. The bookkeeping is the same as for a sole trader right up to the profit for the year — the same income statement, the same statement of financial position. What changes is everything after that: the profit has to be divided, and the division follows the partnership agreement rather than any accounting rule.
That division happens in the appropriation account, which sits immediately below the income statement. It takes the profit for the year, adds back interest charged on drawings, deducts interest on capital and any partners' salaries, and shares whatever remains in the agreed profit-sharing ratio. Nothing in it is an expense of the business — every item is a distribution of profit among the owners, which is why it sits below the profit line and not inside it.
By the end of this topic you should be able to prepare an appropriation account, maintain capital and current accounts under the fixed capital method, explain what happens when there is no written agreement, and handle the entries on the admission of a new partner.
Key terms and definitions
Partnership agreement (deed) — the contract setting out capital contributions, the profit-sharing ratio, salaries, and rates of interest on capital and drawings.
Appropriation account — the statement that divides profit for the year among the partners.
Interest on capital — a return allowed to partners in proportion to what each has invested, to recognise unequal contributions.
Interest on drawings — a charge on partners who withdraw money during the year, to discourage early withdrawal.
Partner's salary — a fixed amount allowed to a partner for work done, appropriated before the residual share. It is not an employment salary and never appears as an expense.
Fixed capital method — capital accounts hold only the original contributions; everything else goes through a separate current account.
Fluctuating capital method — one account per partner, holding contributions, appropriations and drawings together.
Goodwill — the value of the reputation and customer base built by the existing partners, recognised when the ownership structure changes.
Core concepts
Why the appropriation account exists
A sole trader's profit belongs entirely to one person, so no division is needed. In a partnership the profit must be split, and rarely in a simple ratio: one partner may have contributed twice the capital, another may work full time in the business while a third does not.
Interest on capital, salaries and interest on drawings are the mechanisms that make the split fair before the residual is shared. A partner who invested more receives interest on that investment; a partner who works receives a salary; a partner who withdraws money early is charged for it. Only what is left after all three is divided in the profit-sharing ratio.
The crucial point for marks is that none of these is an expense. If a partner's salary were treated as an expense it would reduce profit for the year, and the other partners would bear part of it — which is precisely what the appropriation account is designed to prevent.
Capital and current accounts
Under the fixed capital method the capital account holds only what the partner put in and stays unchanged from year to year. Everything else — interest on capital, salary, share of residual profit, drawings, interest on drawings — passes through the current account.
That separation makes the accounts readable. The capital account answers the question "what did each partner invest?", and the current account answers "what has each partner earned and taken out since?" A current account with a debit balance means the partner has drawn more than they have earned, which is worth commenting on in an examination answer rather than simply reporting.
Under the fluctuating method everything sits in one account, so the two questions cannot be answered separately. CAPE questions usually specify the fixed method; check which is asked for before ruling any accounts.
When there is no agreement
If the partners have no written agreement, the default rules apply: profits and losses are shared equally, no interest is allowed on capital, no interest is charged on drawings, and no partner receives a salary. A partner who has made a loan to the firm, as distinct from contributing capital, is entitled to interest on that loan.
Examiners like this because it tests whether a candidate understands that the agreement is what drives everything else. A question that says "there is no partnership deed" is telling you to ignore the interest and salary figures it may also supply.
Admission of a new partner and goodwill
When a new partner joins, the existing partners are giving up a share of future profits in a business whose reputation they built. Goodwill recognises that.
The usual treatment is to raise goodwill at its agreed value and credit it to the old partners in the old profit-sharing ratio, then write it off immediately by debiting all the partners — including the new one — in the new ratio. The net effect transfers value from the incoming partner to the existing ones without leaving goodwill sitting in the statement of financial position, which is what accounting standards require for internally generated goodwill.
A change in the profit-sharing ratio between existing partners is handled the same way, and for the same reason.
Worked examples
Example 1 — Appropriation account (7 marks)
Adisa and Bhola share profits 3:2. Profit for the year is $180,000. Capitals are Adisa $200,000 and Bhola $150,000, with interest on capital at 5%. Bhola receives a salary of $24,000. Interest on drawings is Adisa $1,200 and Bhola $900.
Interest on capital: Adisa 5% × $200,000 = $10,000; Bhola 5% × $150,000 = $7,500.
Profit available: $180,000 + interest on drawings ($1,200 + $900 = $2,100) = $182,100.
Less appropriations: $10,000 + $7,500 + $24,000 = $41,500.
Residual to share = $182,100 − $41,500 = $140,600.
Adisa's share = 3/5 × $140,600 = $84,360. Bhola's share = 2/5 × $140,600 = $56,240.
Check: $84,360 + $56,240 = $140,600. Interest on drawings is added because it is a charge on the partner, which increases the pool available to divide.
Example 2 — Current account (5 marks)
Adisa's current account opened with a $8,000 credit balance. Drawings for the year were $60,000.
Credits: opening balance $8,000, interest on capital $10,000, share of profit $84,360. Debits: drawings $60,000, interest on drawings $1,200.
Closing balance = $8,000 + $10,000 + $84,360 − $60,000 − $1,200. Working: $8,000 + $10,000 = $18,000; + $84,360 = $102,360; − $60,000 = $42,360; − $1,200 = $41,160 credit.
A credit balance means the firm owes the partner. Had it been a debit balance, Adisa would have drawn out more than the business had credited to him.
Example 3 — No partnership agreement (4 marks)
The same two partners have no deed. Profit is $180,000.
No interest on capital, no salary, no interest on drawings. Profits are shared equally: $180,000 ÷ 2 = $90,000 each.
Compare that with Example 1, where Adisa received $10,000 + $84,360 − $1,200 = $93,160 and Bhola received $7,500 + $24,000 + $56,240 − $900 = $86,840. The two total $180,000, as they must.
So the deed leaves Adisa $3,160 better off and Bhola $3,160 worse off than equal shares would. That is the point of the question, and the reasoning behind it earns the interpretation mark: Adisa's larger capital and larger profit share more than offset the salary Bhola receives for the work he does. A partner who assumes a salary clause must leave them ahead has not done the arithmetic — whether an agreement favours you depends on all its terms together, not on the one clause written in your favour.
Example 4 — Goodwill on admission (5 marks)
Adisa and Bhola share 3:2. Chandra is admitted, and the new ratio is 2:2:1. Goodwill is agreed at $50,000.
Raise goodwill, crediting the old partners in the old ratio: Adisa 3/5 × $50,000 = $30,000; Bhola 2/5 × $50,000 = $20,000.
Write it off, debiting all three in the new ratio: Adisa 2/5 × $50,000 = $20,000; Bhola 2/5 × $50,000 = $20,000; Chandra 1/5 × $50,000 = $10,000.
Net effect: Adisa gains $30,000 − $20,000 = $10,000; Bhola gains $20,000 − $20,000 = nil; Chandra bears $10,000. Chandra has effectively paid Adisa $10,000 for the share of future profits being given up, and no goodwill remains on the statement of financial position.
Common mistakes and how to avoid them
Treating a partner's salary or interest on capital as an expense. Both are appropriations of profit and belong below the profit line.
Deducting interest on drawings instead of adding it. It is a charge on the partner, so it increases the profit available for division.
Sharing the whole profit in the profit-sharing ratio. Only the residual, after all appropriations, is shared.
Putting drawings in the capital account under the fixed method. They belong in the current account.
Applying interest and salaries when the question says there is no deed. No agreement means equal shares and nothing else.
Leaving goodwill in the statement of financial position. Raise it and write it off; internally generated goodwill is not recognised.
Crediting goodwill in the new ratio. It is credited in the old ratio, because the old partners built it, and written off in the new one.
How this links to your Internal Assessment
If the business you have chosen is a partnership, the appropriation account and the current accounts are the natural centrepiece of the accounting section, and they give you something a sole trader cannot: a decision to analyse. Set out what the agreement actually says and whether the division it produces looks fair given what each partner contributes in capital and in work.
Where no written agreement exists — which is common in small Caribbean partnerships — that is a finding worth making. Explain what the default rules would impose, show the difference against what the partners currently assume, and recommend a written deed with specific terms. Quantifying the gap, as in Example 3, turns a generic recommendation into an argued one.
If the business is a sole trader, this topic still gives you a comparison: what would change if the owner took a partner to fund expansion? That is a legitimate evaluative section, provided you state the profit-sharing consequences rather than only the cash benefit.
Exam technique for partnership accounts
Most questions give a profit figure and a list of agreement terms and ask for the appropriation account, the current accounts, or both. Marks are allocated item by item, so enter everything you are confident about even if one figure defeats you.
Lay the appropriation account out vertically: profit for the year, add interest on drawings, less interest on capital, less salaries, then the residual shared in the ratio, with each partner's share shown separately. Show the ratio you are applying — writing "3/5 × $140,600" earns the method mark even if the arithmetic slips.
Command words matter. Prepare means produce the account in proper form with a heading. Calculate each partner's share means show the working. Explain why interest is charged on drawings wants the reason — to discourage early withdrawal and compensate the partners who left their funds in — not a description of the entry. Discuss or assess whether the agreement is fair wants both sides and a stated conclusion.
Always cross-check that the individual shares add back to the residual. It takes seconds and catches most ratio errors.
Quick revision summary
- The accounts are identical to a sole trader's up to profit for the year; the appropriation account divides it.
- Appropriation order: profit for the year, add interest on drawings, less interest on capital, less salaries, then share the residual in the profit-sharing ratio.
- Nothing in the appropriation account is an expense — all of it is distribution of profit.
- Fixed capital method: capital accounts hold contributions only; current accounts hold everything else.
- A debit balance on a current account means the partner has drawn more than they have earned.
- With no agreement: profits shared equally, no interest on capital, no interest on drawings, no salaries; a partner's loan still earns interest.
- Goodwill on admission: raise it and credit the old partners in the old ratio, then write it off against all partners in the new ratio.
- No goodwill remains in the statement of financial position afterwards.
- Cross-check that the partners' shares add back to the residual profit.