Partnerships

• Partners share capital, skills and workload, but most have unlimited liability.
• A partnership agreement sets out capital, the profit-sharing ratio, interest on capital and drawings, salaries and loan interest.
• The appropriation account divides the profit for the year: add interest on drawings; deduct interest on capital and salaries; share the balance in the agreed ratio.
• Interest on a partner’s loan is an expense in the income statement, not an appropriation.
• Capital accounts hold the fixed capital; current accounts record each partner’s share of profit and drawings.

Two or more owners, one agreement

A partnership agreement is a written agreement that avoids later disputes by setting out:

• the capital each partner is to contribute;
• the profit- and loss-sharing ratio;
• whether partners receive interest on capital, and at what rate;
• whether interest is charged on drawings, and any limits on drawings;
• any salaries to be paid to partners;
• the rate of interest on partners’ loans to the business;
• how disputes are settled and the duties of each partner.

Sharing out the profit for the year

The income statement of a partnership is the same as a sole trader’s, except that interest on a partner’s loan is an expense (the partner is acting as a lender). The profit for the year is then carried down to the appropriation account, which shows how it is divided.

Worked example

Lina and Omar share profits 3 : 2. Lina has capital of $60,000 and Omar $40,000. Lina has also lent the business $10,000 at 6% a year. The agreement allows interest on capital at 5% a year and a salary to Omar of $9,000; interest on drawings is Lina $400, Omar $250. The profit before loan interest for the year ended 31 December 2025 was $48,600. Prepare the appropriation account.

Loan interest = 6% × 10,000 = $600, an expense in the income statement, so profit for the year = 48,600 − 600 = $48,000.