Partnership

What it means

A business owned by two or more partners who share profits (and losses) according to a partnership agreement.

Example

Two friends running a firm together and splitting profits equally form a partnership.

Why it matters

Partnerships add features like appropriation accounts, interest on capital and partners' salaries.

In practice

A partnership's accounts differ from a sole trader's in how profit and capital are shown. After the income statement, a partnership prepares a profit and loss appropriation account. This shares the profit for the year among the partners. First it allows any interest on capital and partners' salaries. Then it charges interest on drawings. Finally it splits what is left in the agreed profit-sharing ratio. In the statement of financial position each partner has a capital account, showing fixed capital, and a current account, showing accumulated profit shares less drawings.

Suppose two partners share profits equally and the profit for the year is RM40,000. Each is allowed a salary of RM5,000. The remaining RM30,000 is divided, RM15,000 to each.

Students often confuse a partnership with a sole trader. A sole trader has one owner, a single capital account and no appropriation account. A partnership has two or more owners, an agreement and the extra appropriation and current accounts. Where there is no agreement, profits are shared equally, whatever capital each partner put in.

If appropriation accounts and current accounts confuse you, one of our teachers can build one with you step by step from a past paper. Book a trial class.

Related terms

• Sole trader
• Capital
• Account
• Appropriation account
• Capital account
• Goodwill
• Partner's current account
• Partnership salary
• Profit-sharing ratio

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.2 Partnerships (page 16).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.