IGC-L21 — Partnership Accounts
Understanding how profits are shared between partners and how partnership financial statements are prepared.
Learning Objectives
- define a partnership
- understand the purpose of a partnership agreement
- calculate profit sharing between partners
- account for interest on capital and drawings
- prepare a Profit and Loss Appropriation Account
Concept Framework
What is a Partnership?
A partnership is a business owned by two or more individuals who agree to share profits and responsibilities.
Partners contribute:
• capital
• skills and expertise
• management effort
Partnership Agreement
A partnership agreement is a written document that sets out how the partnership will operate.
It usually includes:
• capital contribution of each partner
• profit sharing ratio
• interest on capital
• interest on drawings
• partner salaries
Profit Sharing
If no partnership agreement exists, profits are shared equally between partners.
However, most partnerships use an agreed profit sharing ratio.
Example:
If profit sharing ratio is 2 : 1, partner A receives twice the share of partner B.
Diagram 1 — Profit Distribution Flow
Net Profit
│
↓
Add Interest on Drawings
│
↓
Deduct Interest on Capital
Deduct Partner Salaries
│
↓
Remaining Profit
│
↓
Shared according to Profit Sharing Ratio
Diagram 2 — Profit and Loss Appropriation Account
The Profit and Loss Appropriation Account shows how profit is distributed between partners.
Structure:
Add Interest on Drawings
Less:
Interest on Capital
Partner Salaries
Remaining Profit
Shared according to Profit Sharing Ratio
Worked Examples
Partners: Ali and Ben
Profit sharing ratio = 2 : 1
Net profit = £30,000
Interest on capital:
Ali £2,000
Ben £1,500
Partner salary:
Ali £4,000
Step 1 — Adjust Profit
Less Interest on Capital £3,500
Less Partner Salary £4,000
————————————-
Remaining Profit £22,500
Step 2 — Share Remaining Profit
Ratio 2 : 1
Ali share:
Ben share:
Final Profit Allocation
| Partner | Interest | Salary | Profit Share | Total |
|---|---|---|---|---|
| Ali | £2,000 | £4,000 | £15,000 | £21,000 |
| Ben | £1,500 | – | £7,500 | £9,000 |
📌 Additional structured partnership questions are available in the
🎯 Lesson wise resources, Module wise resources , Guess Question Papers + YouTube Explanation section.
Students should practise partnership profit distribution regularly to develop examination confidence.
Structured Practice
Level 1 – Concept Check
Define a partnership.
State two contents of a partnership agreement.
What is a profit sharing ratio?
Level 2 – Application Practice
Partners A and B share profits 3 : 2.
Net profit = £25,000
Calculate each partner’s share.
Level 3 – Examination Style Question
Explain why a partnership agreement is important.
(4 marks)
📌 Additional structured Statement of Financial Position questions are available in the 🎯 Lesson wise Resources , Module wise Resources, Guess Question Papers + YouTube Explanation section.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
Students who believe they have mastered this topic should attempt the following:
- Explain the purpose of the Profit and Loss Appropriation Account.
Net profit = £36,000
Profit sharing ratio 3 : 1Calculate the profit share of each partner.
- Explain how partner salaries affect profit distribution.
If any question cannot be answered confidently, review the lesson carefully.
Detailed Activity Solutions
Solution to Level 2 question
Level 2 Solution
Profit = £25,000
Ratio 3 : 2
Total parts = 5
Partner A:
Partner B:
Solutions to Proficiency Check
Proficiency Check Solution
Net profit = £36,000
Ratio 3 : 1
Total parts = 4
Partner A:
Partner B:
How This Topic Appears in the Examination
This topic commonly appears through:
• preparation of Profit and Loss Appropriation Accounts
• calculation of profit sharing ratios
• interpretation of partnership agreements
Examiners frequently assess:
• correct distribution of profit
• accurate calculations
• understanding of partnership agreements
Students should practise partnership questions regularly and review video explanations for clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I understand what a partnership is
- I understand profit sharing ratios
- I can prepare a Profit and Loss Appropriation Account
- I can calculate partner profit shares
Continue Your Preparation
Go beyond the lesson with curated resources, examination practice and video learning.
PREMIUM RESOURCES
Master the topic with curated learning, revision and assessment resources
GUESS PAPERS
Prepare for the examination with complete Guess Paper packages and Mark Schemes.
VIDEO ON DEMAND
Watch, revise and strengthen your understanding with Shasha Academy videos.