Accounting for Partnership: Basic Concepts

The partnership deed and the rules when it is silent, fixed and fluctuating capitals, interest on capital and drawings, the appropriation account, guarantees and past adjustments.

Key ideas

• If the deed is silent: profits are shared equally, no interest on capital or drawings, no salary or commission, and 6% a year on a partner’s loan.
• Under the fixed capital method the capital accounts stay unchanged and every adjustment goes to current accounts; under the fluctuating method it all goes to the capital accounts.
• The Profit and Loss Appropriation Account is credited with the net profit and interest on drawings, and debited with interest on capital, salary and commission; the rest is shared in the profit-sharing ratio.
• Interest on capital runs for the whole year on the opening capital, and on additional capital only from the date it was brought in.
• Interest on drawings is charged for the average time each amount was out: equal monthly drawings give 6.5 months (start of month), 6 (middle) or 5.5 (end).
• A partner guaranteed a minimum profit is paid the deficiency by the guaranteeing partners in their own ratio.
• A past omission is put right with one adjusting entry: what each partner should have got, less what each is charged back in the profit-sharing ratio.

Remember

Watch out

• Allowing interest on capital, salary or commission when the deed is silent.
• Using 6 months for equal drawings at the start of every month (it is 6.5).
• Debiting interest on drawings in the appropriation account: it is credited.

Worked example