To explain the advantages and disadvantages of forming a partnership, to describe the essential clauses of a partnership agreement, and to demonstrate how partnership accounts are prepared in accordance with the Cambridge IGCSE Accounting 0452 syllabus.
A partnership is a business structure in which two or more persons (partners) agree to share the profits, losses and management responsibilities of a business. The written agreement between the partners is called the partnership agreement.
Although a partnership can be formed verbally, the syllabus expects students to know the key clauses that should be written into a formal agreement:
| Advantages | Disadvantages |
|---|---|
| Combined resources – partners pool capital, equipment and expertise. | Unlimited personal liability – each partner is liable for all partnership debts. |
| Shared expertise – complementary skills improve decision‑making. | Potential for conflict – differences of opinion may lead to disputes. |
| Ease of formation – simple agreement, no need to register as a limited company. | Profit must be shared – individual earnings are usually lower than for a sole trader. |
| Flexibility in management – partners can change the internal structure without corporate formalities. | Limited life span – partnership may end when a partner withdraws, retires or dies unless a continuation clause exists. |
| Taxation only at partner level – avoids double taxation of companies. | Difficulty raising large capital – cannot issue shares. |
| High motivation – partners directly benefit from the business’s success. | Decision‑making may be slower – agreement of several partners is required. |
The partnership agreement must state which method will be used. The three methods most commonly examined are:
| Method | Basis of allocation | Typical use |
|---|---|---|
| Capital‑ratio | Proportion of each partner’s capital contribution. | When partners invest different amounts of capital. |
| Equal share | All partners receive the same amount, regardless of capital. | When partners contribute similar capital or wish to share equally. |
| Negotiated (special) ratio | Any agreed‑upon percentages (e.g., 40 % / 30 % / 30 %). | When partners bring different skills, effort or seniority. |
Remember: the chosen method and the exact percentages must be recorded in the partnership agreement and used in the Appropriation Account.
Before profit is divided, the partnership may need to make the following adjustments (all are optional and must be stated in the agreement):
Interest Expense – Partner X Dr XXXPartner X’s Loan Account Cr XXX
Interest Expense – Capital Dr XXXPartner X’s Capital Account Cr XXX
Partner X’s Current (Drawings) Account Dr XXXInterest Income – Drawings Cr XXX
Salaries Expense – Partner X Dr XXXPartner X’s Current (Drawings) Account Cr XXX
Each partner has two personal accounts:
| Partner A – Capital Account | Partner A – Current (Drawings) Account |
|---|---|
Dr Cr
-------------------------
Balance b/f 30,000
Interest on Cap 1,200
Share of Profit 7,200
-------------------------
Balance c/f 38,400
|
Dr Cr
-------------------------
Drawings 5,000
Interest on Draw 250
-------------------------
Balance c/f 5,250
|
Similar T‑accounts are prepared for each partner.
------------------------------------------------- | Profit & Loss Account (Net Profit) | |-----------------------------------------------| | Interest on Capital | XXX | | Salaries | XXX | | Interest on Drawings | XXX | |-----------------------------------------------| | Profit to be Shared | XXX | | – Partner A (share) | XXX | | – Partner B (share) | XXX | | – Partner C (share) | XXX | -------------------------------------------------
The example below follows the steps required by the syllabus: start from a trial balance, record the necessary adjustments, prepare the three financial statements and close the partners’ capital accounts.
| Trial Balance (as at 31 May 2025) | |
|---|---|
| Cash | 15,000 Dr |
| Trade Receivables | 8,000 Dr |
| Equipment (cost) | 20,000 Dr |
| Accumulated Depreciation – Equip. | 5,000 Cr |
| Trade Payables | 6,000 Cr |
| Partner A – Capital | 30,000 Cr |
| Partner B – Capital | 20,000 Cr |
| Partner C – Capital | 50,000 Cr |
| Partner A – Current (Drawings) | 5,000 Dr |
| Partner B – Current (Drawings) | 3,000 Dr |
| Partner C – Current (Drawings) | 4,000 Dr |
| Sales Revenue | 70,000 Cr |
| Cost of Goods Sold | 42,000 Dr |
| Rent Expense | 6,000 Dr |
| Wages Expense | 8,000 Dr |
| Interest on Partner B’s Loan (5 % on $10,000) | 500 Dr |
| Interest on Capital (4 % on capital balances) | — (to be calculated) |
| Salaries to Partner C (manager) | — (to be calculated) |
| Revenue | Amount ($) |
|---|---|
| Sales Revenue | 70,000 |
| Total Revenue | 70,000 |
| Expenses |
| Cost of Goods Sold | 42,000 |
| Rent Expense | 6,000 |
| Wages Expense | 8,000 |
| Interest on Partner B’s Loan | 500 |
| Total Expenses | 56,500 |
| Net Profit | 13,500 |
| Appropriation Account for the year ended 31 May 2025 | |
|---|---|
| Net profit transferred from Income Statement | 13,500 Cr |
| Interest on Capital – A | 1,200 Dr |
| Interest on Capital – B | 800 Dr |
| Interest on Capital – C | 2,000 Dr |
| Salaries – Partner C | 2,500 Dr |
| Interest on Drawings | 240 Dr |
| Profit available for sharing | 7,260 Cr |
| Profit share – Capital‑ratio (30 % / 20 % / 50 %) | |
| Partner A (30 %) | 2,178 Cr |
| Partner B (20 %) | 1,452 Cr |
| Partner C (50 %) | 3,630 Cr |
| Total credited to partners | 7,260 Cr |
| Partner | Opening Capital | + Interest on Capital | + Share of Profit | – Salaries (if applicable) | Closing Capital |
|---|---|---|---|---|---|
| A | 30,000 | 1,200 | 2,178 | – | 33,378 |
| B | 20,000 | 800 | 1,452 | – | 22,252 |
| C | 50,000 | 2,000 | 3,630 | 2,500 (salary) | 53,130 |
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