5.2 Partnerships – Capital and Current Accounts
1. What is a partnership?
A partnership is a business carried on by two or more persons who share the profits, losses and management of the enterprise.
2. Advantages and disadvantages (syllabus requirement)
- Advantages
- Combined skills, experience and capital – partners bring complementary expertise.
- Shared responsibility for losses – risk is spread among partners.
- Simple to set up – no need to register with Companies House.
- Flexible profit‑sharing – partners can agree any ratio, not fixed by law.
- Disadvantages
- Unlimited liability – each partner is personally liable for business debts.
- Potential for disputes – over profit sharing, decision‑making or withdrawal of capital.
- Limited life – the partnership ends on death or withdrawal of a partner unless otherwise agreed.
3. Typical contents of a partnership agreement (syllabus requirement)
Each item is included because the IGCSE syllabus expects students to know *why* it matters for accounting.
- Names of the partners – identifies who owns the capital.
- Initial capital contributions – establishes the opening balances of the capital accounts.
- Profit‑ and loss‑sharing ratio – determines how the profit (or loss) is allocated.
- Interest on capital (rate & frequency) – rewards partners for the use of their equity.
- Interest on drawings (rate & frequency) – penalises partners for taking cash out of the business.
- Rules for additional capital contributions – e.g. “capital may be added by cash or assets; entry: Dr Cash / Asset – Cr Partner Capital”.
- Rules for capital withdrawals – when and how partners may take back part of their original investment.
- Method of recording drawings – usually a separate current‑account for each partner.
- Optional closing of current accounts to capital – states whether the year‑end balance is transferred to the capital account.
4. Partnership accounting – overview
The partnership accounts consist of four main statements:
- Capital accounts – record each partner’s long‑term equity in the business.
- Current accounts – record the periodic flow of profit, interest on capital, interest on drawings and drawings.
- Appropriation account – shows how profit is allocated before it is transferred to the current accounts.
- Statement of changes in partners’ capital (or a T‑account format) – presents opening capital, adjustments during the year and closing capital for each partner.
5. Capital accounts
5.1 Purpose and presentation
- Show each partner’s permanent equity stake – the amount that belongs to the partner for the life of the partnership.
- Appears in the Statement of Financial Position under “Partners’ capital”.
5.2 Typical entries (why they are made)
- Initial capital contribution – establishes the opening balance.
- Additional capital contributed – reflects new investment by a partner.
- Share of profit or loss (when allocated on a capital basis) – increases or decreases equity.
- Interest on capital – rewards the partner for providing equity.
- Capital withdrawals (usually only on dissolution) – reduces the permanent equity.
5.3 Uses
- Determine each partner’s equity share for the balance sheet.
- Provide the basis for profit or loss allocation when the ratio is based on capital.
- Calculate interest on capital (if required by the agreement).
- Supply the closing balance for the “Statement of changes in partners’ capital”.
5.4 Example – journal entry for additional capital
Dr Cash (or Asset) £ 5,000
Cr A – Capital Account £ 5,000
6. Current accounts
6.1 Purpose and presentation
- Record the day‑to‑day movements that affect a partner’s entitlement to profit for the current accounting period.
- Closed at the end of each financial year (unless the agreement states otherwise).
- Balances appear in the “Statement of changes in partners’ capital” as a temporary figure before any transfer to the capital account.
6.2 Typical entries (why they are made)
- Share of profit – credits the partner’s entitlement to the year’s profit.
- Interest on capital – credits the partner for the use of their equity.
- Interest on drawings – debits the partner as a charge for taking cash out.
- Drawings – debits the partner for cash withdrawn during the year.
6.3 Uses
- Track each partner’s entitlement to the current year’s profit.
- Record drawings and any interest charged on those drawings.
- Show the amount each partner is owed (or owes) at the end of the period.
- Facilitate the optional transfer of the closing balance to the capital account.
6.4 Example – journal entry for drawings
Dr A – Current Account (Drawings) £ 4,000
Cr Cash £ 4,000
7. Appropriation account (required by the syllabus)
The appropriation account sits between the profit‑and‑loss account and the partners’ current accounts. It shows how profit is adjusted before being transferred.
| Appropriation Account for the year ended 31 Dec 20XX |
| Profit and loss account (balance transferred) |
£ 12,000 |
| Interest on capital |
£ 2,500 |
| Profit available for appropriation |
£ 14,500 |
| Profit share – A (60 %) |
£ 8,700 |
| Profit share – B (40 %) |
£ 5,800 |
| Interest on drawings (deducted) |
£ 700 |
| Balance transferred to current accounts |
£ 13,800 |
8. Key differences between capital and current accounts
| Aspect |
Capital account |
Current account |
| Purpose |
Shows long‑term equity stake of each partner. |
Records short‑term profit share, interest and drawings for the current period. |
| Typical entries |
Initial & additional capital, profit/loss (if capital‑based), interest on capital, capital withdrawals. |
Profit share, interest on capital, interest on drawings, drawings. |
| Frequency of update |
When capital changes or profit is allocated on a capital basis. |
Continuously during the year – usually posted each month/quarter. |
| Closing treatment |
Remains open for the life of the partnership; closed only on dissolution. |
Closed at year‑end; balance transferred to capital account only if the agreement requires it. |
| Presentation in final accounts |
Statement of Financial Position (under “Partners’ capital”). |
Statement of Changes in Partners’ Capital (or shown as a temporary figure before transfer). |
| Impact on profit distribution |
Profit may be shared in proportion to capital balances. |
Profit is first recorded here according to the agreed sharing ratio. |
9. Worked example (journal entries, T‑accounts and statement of changes)
Partnership details
- Partners: A and B
- Initial capital: A = £ 30,000; B = £ 20,000
- Profit‑sharing ratio: 60 % to A, 40 % to B (based on capital)
- Interest on capital: 5 % p.a.
- Interest on drawings: 10 % p.a.
- Drawings during the year: A = £ 4,000; B = £ 3,000
- Profit for the year: £ 12,000
9.1 Allocation of profit (based on capital ratios)
Dr Profit and Loss Account 12,000
Cr A – Current Account (Profit share) 7,200
Cr B – Current Account (Profit share) 4,800
9.2 Interest on capital
Dr Interest Expense – Capital 2,500
Cr A – Current Account (Interest on capital) 1,500
Cr B – Current Account (Interest on capital) 1,000
9.3 Drawings
Dr A – Current Account (Drawings) 4,000
Cr Cash 4,000
Dr B – Current Account (Drawings) 3,000
Cr Cash 3,000
9.4 Closing the current accounts (transfer to capital – optional)
Dr A – Current Account (Profit share) 7,200
Dr A – Current Account (Interest on capital) 1,500
Cr A – Capital Account (Opening balance) 30,000
Cr A – Capital Account (Closing balance) 38,700
Dr B – Current Account (Profit share) 4,800
Dr B – Current Account (Interest on capital) 1,000
Cr B – Capital Account (Opening balance) 20,000
Cr B – Capital Account (Closing balance) 25,800
9.5 Statement of changes in partners’ capital (T‑account view)
| Partner |
Opening Capital |
Adjustments during the year |
Closing Capital |
| A |
£ 30,000 |
+ £ 7,200 (Profit share)
+ £ 1,500 (Interest on capital)
– £ 4,000 (Drawings)
|
£ 34,700 |
| B |
£ 20,000 |
+ £ 4,800 (Profit share)
+ £ 1,000 (Interest on capital)
– £ 3,000 (Drawings)
|
£ 22,800 |
10. Scope of the IGCSE (0452) syllabus
- Required: knowledge of capital and current accounts, the appropriation account and the statement of changes in partners’ capital.
- Not required: detailed treatment of admission, retirement, death of a partner, or full dissolution procedures.
- Any extra features (e.g., transferring current‑account balances to capital at year‑end) should be shown only if the partnership agreement explicitly states that they are required.
11. Summary
- Capital accounts record the long‑term equity of each partner and remain open for the life of the partnership.
- Current accounts record the periodic flow of profit, interest on capital, interest on drawings and drawings; they are normally closed each year.
- The appropriation account bridges profit from the profit‑and‑loss account to the partners’ current accounts.
- Understanding the distinction and the required journal entries enables students to prepare correct partnership accounts and to explain how profit is shared and capital is presented in the final accounts.