Partnership accounts: practice questions

How to approach these questions

Partnership questions have more moving parts than sole-trader accounts. So know the sequence of statements and prepare them in order. The chain is usually the income statement to find profit for the year.

Next comes the appropriation account that shares that profit, then the partners' current accounts. Finally the statement of financial position shows capital and current account balances.

Before you calculate, read the partnership agreement in the question. Jot down four terms at the top of your page: the profit-sharing ratio, interest on capital, interest on drawings and any partner's salary. These drive every figure that follows.

Start the appropriation account with the profit for the year from the income statement. Then apply the agreement in the right direction. Interest on capital and partners' salaries are appropriations to the partners, so they reduce the amount left to share.

Interest on drawings is charged to the partners, so it is added back to the pool. A common layout is: profit for the year, add interest on drawings, deduct salaries and interest on capital, leaving the residual profit. Divide that in the profit-sharing ratio.

For example, residual profit is RM30,000 and the ratio is 3:2. One partner receives RM18,000 and the other RM12,000. Show the split so the method mark is clear.

Calculate interest on capital on the capital account balance, usually the opening balance unless the question says otherwise. Check whether any capital was introduced during the year. A 5% rate on capital of RM40,000 gives RM2,000.

Interest on drawings is trickier because it may depend on timing. If the question gives dates, apply the rate for the months the money was withdrawn. If it gives only a total and a rate, apply the rate to the total.

State any assumption you make. Do these calculations in the margin and carry only the finished figures into the appropriation account.

The current accounts are where students most often go wrong, so use a column for each partner. Credit each partner with their share of residual profit, their salary and their interest on capital, because these increase what the business owes them. Debit each partner with their drawings and interest on drawings, because these reduce what they are owed.

Bring down the opening balance on the correct side. A debit opening balance means the partner already owed the business. Balance each column and carry the closing figure to the statement of financial position.

Capital accounts hold the fixed long-term investment. Current accounts take the year-to-year movements. Keep them separate.

The most damaging traps are directional. Interest on drawings on the wrong side, or drawings credited instead of debited, reverses the whole current account. Salaries here are appropriations, not expenses in the income statement.

Do not deduct a partner's salary before you reach profit for the year. If a partner has no salary or no interest on capital, leave that cell blank and do not invent a figure. Check whether the ratio applies only to the residual profit or, occasionally, to the whole profit.

Finally, check that the pieces reconcile. Add across the appropriation account: the profit shares, salaries and interest on capital, less interest on drawings, must equal the profit for the year. In the statement of financial position, the capital and current account balances together must equal net assets.

If partnership questions feel like too many steps at once, we can help. One of our teachers can walk you through the full chain on a past-paper question, one statement at a time. Book a trial class