Partnership Accounts
What the domain tests
This domain covers appropriation of profit, partners' capital and current accounts, admission, retirement and dissolution. You must apply the partnership agreement and distinguish appropriation from expense.
Rules
A partnership agreement may provide for interest on capital, partners' salaries, interest on drawings and a profit-sharing ratio. In the absence of agreement, the Partnership Act rules apply in many common-law systems, but in Cameroon the written agreement and OHADA commercial company rules govern; always follow the agreement given.
The appropriation account starts with profit and deducts interest on capital and salaries, adds interest on drawings, then shares the residual profit in the agreed ratio. Interest on capital and salaries are appropriations, not expenses. Interest on drawings is income to the partnership and is debited to the partner's current account.
Capital accounts record permanent capital. Current accounts record appropriations, drawings and interest. On admission, goodwill may be raised and written off, and the new partner pays for a share of goodwill, which compensates sacrificing partners. On retirement, the retiring partner is credited with capital, current account and share of goodwill, and paid the amount due. On dissolution, a realisation account records asset disposal, realisation expenses and the profit or loss on realisation, which is shared in the profit-sharing ratio.
Worked example
Profit is 1,200,000. A has capital 2,000,000 and B 1,000,000; interest on capital is 10%; B receives a salary of 150,000; interest on drawings is A 20,000 and B 10,000. Residual profit is shared 3:2.
- Interest on capital: A 200,000; B 100,000.
- Residual = 1,200,000 − 300,000 − 150,000 + 30,000 = 780,000.
- Share: A 468,000; B 312,000.
- A's current account credit = 200,000 + 468,000 − 20,000 = 648,000; B's = 100,000 + 150,000 + 312,000 − 10,000 = 552,000. Total 1,200,000.
Traps
Partners' salaries are appropriations, not wages expense. Interest on drawings is credited to the appropriation account and debited to the current account. Goodwill on admission is not a cash payment to the firm unless the agreement says so; it compensates sacrificing partners. Do not merge capital and current accounts unless the partnership uses fluctuating capital accounts.