IGCSE Accounting — Partnerships: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 5.2: Partnerships

Partnerships

A partnership shares profit according to an agreement — but before it’s simply split, several adjustments (interest, salaries) reward partners differently for what they’ve each contributed.

1. The Appropriation Account

The appropriation account shows how the year’s profit is divided among the partners, following their partnership agreement:

Profit for the year − Interest on capital − Partners’ salaries + Interest on drawings = Residual profit, shared in the profit-sharing ratio

Worked example — appropriation account Partners A and B share residual profit equally. Profit for the year is $30,000. A has capital of $20,000 and B has capital of $10,000, with interest on capital at 5%. Calculate each partner’s total share of profit.
Interest on capital: A = 20,000 × 5% = $1,000. B = 10,000 × 5% = $500.
Residual profit = 30,000 − 1,000 − 500 = $28,500, split equally = $14,250 each.
A’s total share = 1,000 + 14,250 = $15,250. B’s total share = 500 + 14,250 = $14,750.

2. Capital Accounts and Current Accounts

Account	Records
Capital account	Only the capital each partner has introduced (usually a fixed amount, rarely changes)
Current account	Each partner’s share of profit, salary, interest on capital, less drawings and interest on drawings — fluctuates regularly

A partner’s loan to the business (separate from their capital) is shown as a liability, and interest on it is an expense in the statement of profit or loss, before arriving at the profit to be appropriated.

Common mistakes to watch for

Deducting a partner’s salary as a business expense — it’s an appropriation of profit, not an expense in arriving at profit for the year.
Forgetting interest on drawings is ADDED back into the profit available to share (it penalises partners for withdrawing profit early).
Mixing up capital accounts (fixed, rarely changes) with current accounts (fluctuates with profit share, salary, drawings each year).

Key Vocabulary Recap

Appropriation account — shows how profit is divided among partners

Profit-sharing ratio — the agreed ratio in which residual profit is split

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 5.2, Partnerships: partnership agreements, appropriation accounts, profit-sharing, interest on capital and drawings, partners’ salaries and loans, capital and current accounts, and partnership financial statements. (Dissolution, changes to profit-sharing ratio, and admission/departure of a partner are not examined.)

Practice questions

IGCSE Accounting 0452 · Section 5.2: Partnerships — Practice Question Bank (no answers)

Partnerships — Practice

Covers: appropriation accounts, interest on capital/drawings, and capital/current accounts. 10 questions.

State the purpose of an appropriation account.

Explain the difference between a partner’s capital account and current account.

Partners A and B share residual profit equally. Profit for the year is $30,000. A has capital of $20,000 and B has capital of $10,000, with interest on capital at 5%. Calculate each partner’s total share of profit.

Explain why interest on capital is given to partners.

Explain why interest on drawings is charged to partners.

Explain whether a partner’s salary is treated as a business expense or an appropriation of profit.

Explain how a partner’s loan to the business is treated differently from their capital.

Two partners, C and D, share profits in the ratio 3:2. Residual profit after all appropriations is $20,000. Calculate each partner’s share.

State two advantages of forming a partnership rather than operating as a sole trader.

Q10

State two items that might be included in a written partnership agreement.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 5.2: Partnerships — Solutions

Partnerships — Practice: Solutions

Purpose of an appropriation account.

✓It shows how the profit for the year is divided among the partners, according to the partnership agreement (interest on capital, salaries, interest on drawings, then the residual profit shared in the profit-sharing ratio).

Capital account vs current account.

✓A capital account records only the capital a partner has introduced into the business, and usually stays fixed. A current account records a partner’s share of profit, salary, and interest on capital, less their drawings and interest on drawings — it fluctuates regularly.

A cap$20,000, B cap$10,000, 5% interest, profit$30,000, equal split.

Interest on capital: A=20,000×5%; B=10,000×5%

A=1,000; B=500

Residual profit = 30,000−1,000−500, split equally

28,500÷2=14,250 each

✓A: 1,000+14,250 = $15,250. B: 500+14,250 = $14,750

Why is interest on capital given?

✓To fairly reward partners who have contributed more capital to the business, before the remaining profit is shared according to the profit-sharing ratio.

Why is interest on drawings charged?

✓To discourage partners from withdrawing profit early in the year (before it has actually been earned), by charging them for the benefit of having used that money sooner — the amount charged increases the profit available to be shared among all partners.

Partner’s salary: expense or appropriation?

✓A partner’s salary is an appropriation of profit, not a business expense — it does not reduce the profit for the year shown before appropriations, but is deducted as part of dividing that profit among the partners.

Partner’s loan vs capital.

✓A partner’s loan is shown as a liability of the business (separate from their capital account), and interest on it is treated as a business expense in the statement of profit or loss — reducing profit before it reaches the appropriation account, unlike interest on capital.

C:D ratio 3:2, residual profit $20,000.

Total parts = 3+2=5. Value per part = 20,000÷5

4,000 per part

✓C: 3×4,000 = $12,000. D: 2×4,000 = $8,000

Two advantages of a partnership over a sole trader.

✓Any two of: more capital can be raised (from multiple partners); shared workload and responsibility; partners may bring different skills/expertise; shared financial risk.

Q10

Two items in a partnership agreement.

✓Any two of: the profit-sharing ratio; the rate of interest on capital; the rate of interest on drawings; partners’ salaries; arrangements for partners’ loans.

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