What you'll learn
- What a partnership is and what the partnership agreement should contain.
- The difference between a capital account and a current account.
- How to calculate interest on capital, partners' salaries and interest on drawings.
- How to divide the remaining profit (or loss) according to the profit-sharing ratio.
- How to record everything in the General Ledger and present it in the financial statements.
What is a partnership?
A partnership is a business owned by two or more partners who share the profits and losses according to a written partnership agreement. Its main characteristics are:
- Between 2 and 20 partners (the usual limit for a general partnership).
- It is not a separate legal person — the partners are jointly liable for the debts of the business.
- Each partner contributes capital and shares in the profits.
- A partnership agreement sets out the rules. If there is no agreement, profits and losses are shared equally.
The partnership agreement normally states:
- The capital each partner contributes.
- Salaries paid to partners for the work they do in the business.
- Interest on capital.
- Interest on drawings.
- The profit-sharing ratio.
Capital accounts and current accounts
- Capital account — records the fixed amount each partner contributed. It usually stays the same unless a partner contributes more capital or withdraws capital.
- Current account — records the partner's share of profit, salary and interest on capital (credits), and drawings and interest on drawings (debits). It moves up and down every year.
- Drawings — money or goods a partner takes for personal use. Drawings reduce the partner's current account.
Appropriation of profit
Profit is not simply split in the ratio. It is first appropriated (distributed) using the agreement, in this order:
- Deduct partners' salaries.
- Deduct interest on capital.
- Add interest on drawings (it increases the profit available).
- Share the remaining profit in the profit-sharing ratio.
If the remaining amount is negative, it is a loss, shared in the same ratio.
Worked example 1 — Full distribution of profit
Partners A. Naidoo and B. Dlamini. Profit for the year: R600 000,00. Year end 28 February 2025.
| Item | A. Naidoo | B. Dlamini |
|---|---|---|
| Capital (1 March 2024) | 400 000,00 | 300 000,00 |
| Current account (1 March 2024) | 50 000,00 Cr | 20 000,00 Cr |
| Interest on capital | 12% per year | 12% per year |
| Partners' salaries | 120 000,00 | 96 000,00 |
| Interest on drawings | 4 800,00 | 3 600,00 |
| Drawings for the year | 150 000,00 | 110 000,00 |
| Profit-sharing ratio | 3 | 2 |
Step 1 — Interest on capital.
- Naidoo: R400 000,00 × 12% = R48 000,00.
- Dlamini: R300 000,00 × 12% = R36 000,00.
Step 2 — Appropriation of the R600 000,00 profit.
| Appropriation (Distribution of profit) | Amount (R) |
|---|---|
| Profit for the year | 600 000,00 |
| Less: partners' salaries | (216 000,00) |
| Less: interest on capital | (84 000,00) |
| Add: interest on drawings | 8 400,00 |
| Profit available for sharing | 308 400,00 |
Step 3 — Share the remaining profit in the ratio 3:2.
- Naidoo: R308 400,00 × 3/5 = R185 040,00.
- Dlamini: R308 400,00 × 2/5 = R123 360,00.
Step 4 — Complete each partner's current account.
| Current account: A. Naidoo | Debit (R) | Credit (R) |
|---|---|---|
| Balance (1 March 2024) | 50 000,00 | |
| Interest on capital | 48 000,00 | |
| Salary | 120 000,00 | |
| Share of profit | 185 040,00 | |
| Interest on drawings | 4 800,00 | |
| Drawings | 150 000,00 | |
| Balance (28 February 2025) | 248 240,00 |
| Current account: B. Dlamini | Debit (R) | Credit (R) |
|---|---|---|
| Balance (1 March 2024) | 20 000,00 | |
| Interest on capital | 36 000,00 | |
| Salary | 96 000,00 | |
| Share of profit | 123 360,00 | |
| Interest on drawings | 3 600,00 | |
| Drawings | 110 000,00 | |
| Balance (28 February 2025) | 161 760,00 |
Check Naidoo: R50 000,00 + R48 000,00 + R120 000,00 + R185 040,00 − R4 800,00 − R150 000,00 = R248 240,00. Check Dlamini: R20 000,00 + R36 000,00 + R96 000,00 + R123 360,00 − R3 600,00 − R110 000,00 = R161 760,00.
Step 5 — Check that the total distributed equals the profit.
| Partner | Salary (R) | Interest on capital (R) | Less interest on drawings (R) | Share of profit (R) | Total (R) |
|---|---|---|---|---|---|
| A. Naidoo | 120 000,00 | 48 000,00 | (4 800,00) | 185 040,00 | 348 240,00 |
| B. Dlamini | 96 000,00 | 36 000,00 | (3 600,00) | 123 360,00 | 251 760,00 |
| Total | 216 000,00 | 84 000,00 | (8 400,00) | 308 400,00 | 600 000,00 |
The two partner totals add up to R348 240,00 + R251 760,00 = R600 000,00, which equals the profit for the year.
Worked example 2 — Interest on capital with a mid-year contribution
C. Botha has capital of R200 000,00. On 1 September she contributed another R60 000,00. Interest on capital is 10% per year. The year ends 28 February.
- On R200 000,00 for the full year: R200 000,00 × 10% = R20 000,00.
- On R60 000,00 for 6 months (1 September to 28 February): R60 000,00 × 10% × 6/12 = R3 000,00.
- Total interest on capital = R20 000,00 + R3 000,00 = R23 000,00.
Worked example 3 — Interest on drawings
C. Botha withdrew R5 000,00 on 1 June and R8 000,00 on 1 December. Interest on drawings is 12% per year. The year ends 28 February.
- On R5 000,00 for 9 months (June to February): R5 000,00 × 12% × 9/12 = R450,00.
- On R8 000,00 for 3 months (December to February): R8 000,00 × 12% × 3/12 = R240,00.
- Total interest on drawings = R450,00 + R240,00 = R690,00.
Recording in the General Ledger
The whole appropriation can be recorded in one General Journal entry (using Worked example 1):
| Details | Debit (R) | Credit (R) |
|---|---|---|
| Appropriation account (salaries) | 216 000,00 | |
| Current account: A. Naidoo | 120 000,00 | |
| Current account: B. Dlamini | 96 000,00 | |
| Appropriation account (interest on capital) | 84 000,00 | |
| Current account: A. Naidoo | 48 000,00 | |
| Current account: B. Dlamini | 36 000,00 | |
| Current account: A. Naidoo (interest on drawings) | 4 800,00 | |
| Current account: B. Dlamini (interest on drawings) | 3 600,00 | |
| Appropriation account | 8 400,00 | |
| Appropriation account (share of profit) | 308 400,00 | |
| Current account: A. Naidoo | 185 040,00 | |
| Current account: B. Dlamini | 123 360,00 |
The debits total R616 800,00 and the credits total R616 800,00, so the entry balances.
The Appropriation account then looks like this:
| Appropriation account | Debit (R) | Credit (R) |
|---|---|---|
| Partners' salaries | 216 000,00 | |
| Interest on capital | 84 000,00 | |
| Current account: A. Naidoo (share of profit) | 185 040,00 | |
| Current account: B. Dlamini (share of profit) | 123 360,00 | |
| Profit for the year 600 000,00 | ||
| Interest on drawings 8 400,00 | ||
| Total | 608 400,00 | 608 400,00 |
Common mistakes
- Sharing the full profit in the ratio without first deducting salaries and interest on capital.
- Forgetting to add interest on drawings to the profit available for sharing.
- Debiting interest on capital to the partners' current accounts instead of crediting it.
- Confusing capital accounts (fixed) with current accounts (fluctuating).
- Using the wrong number of months for a mid-year contribution or withdrawal.
- Forgetting that if there is no partnership agreement, profits and losses are shared equally.
- Recording drawings in the capital account instead of the current account.
Quick summary / cheat sheet
- Order of appropriation: salaries, then interest on capital, then add interest on drawings, then share the remainder in the ratio.
- Interest on capital: Capital × rate (adjust for months if the capital changes).
- Interest on drawings: Drawings × rate × months ÷ 12.
- Current account credits: balance brought forward + interest on capital + salary + share of profit. Debits: drawings + interest on drawings.
- No partnership agreement means profits and losses are shared equally.
- A negative remainder is a loss, shared in the same ratio.
- The capital accounts stay fixed; the current accounts carry the running balance each year.
Practice questions
- Two partners share profits 2:1. After salaries and interest are deducted, R150 000,00 remains. How much does each partner receive?
- A partner has capital of R250 000,00 and earns interest on capital at 8% per year. Calculate the interest.
- A partner withdraws R6 000,00 on 1 May. Interest on drawings is 10% per year and the year ends 31 December. Calculate the interest on drawings.
- True or false: if there is no partnership agreement, profits are shared equally.
- A partner's capital is R180 000,00. On 1 October the partner contributed an extra R40 000,00. Interest on capital is 12% per year and the year ends 31 December. Calculate the total interest on capital.
- Profit for the year is R200 000,00. Partners' salaries total R90 000,00, interest on capital totals R30 000,00 and interest on drawings totals R4 000,00. What is the profit available for sharing?
Answers
- A 2:1 ratio has three parts. R150 000,00 ÷ 3 = R50 000,00. The first partner receives 2 × R50 000,00 = R100 000,00, and the second receives R50 000,00.
- R250 000,00 × 8% = R20 000,00.
- 8 months (May to December): R6 000,00 × 10% × 8/12 = R400,00.
- True.
- R180 000,00 × 12% = R21 600,00, plus R40 000,00 × 12% × 3/12 = R1 200,00. Total = R22 800,00.
- R200 000,00 − R90 000,00 − R30 000,00 + R4 000,00 = R84 000,00.
Official EduRank Team notes. Always cross-check with your textbook and teacher.