ZIMSEC A Level · Accounting · Form 5
The partnership agreement
Sets out capital, profit-sharing ratio, interest on capital and drawings, salaries and the procedure for admission or retirement. Without an agreement, profits are shared equally, with no interest on capital or salaries.
Appropriation account
Profit for the year + interest on drawings − interest on capital − partners' salaries = residual profit, shared in the profit-sharing ratio.
Worked example: Profit is US$60 000. Interest on capital is 10%: Rudo US$50 000, Tino US$30 000. Tino receives a salary of US$12 000. Residual profit is shared 3 : 2. Prepare the appropriation.
Interest: Rudo 5 000; Tino 3 000. Salary: Tino 12 000.
Residual = 60 000 − 8 000 − 12 000 = 40 000 → Rudo 24 000; Tino 16 000
Capital and current accounts
Fixed capital accounts hold the agreed capital; current accounts record interest, salaries, shares of profit and drawings.
Changes in partnership
- Goodwill: the value of reputation and customer base. On admission or retirement, it is created (Dr Goodwill, Cr old partners' capitals in old ratio) and may be written off (Dr all partners in new ratio, Cr Goodwill).
- Revaluation account: records gains or losses on revaluing assets, shared in the old ratio.
- Dissolution: a realisation account records the sale of assets and payment of liabilities. The Garner v Murray rule applies when a partner's capital account has a deficit they cannot pay.
Check yourself
- How are profits shared if there is no partnership agreement?
- In which account are partners' salaries recorded?
- When a new partner joins, in which ratio is goodwill credited to existing partners?
Show answers
- Equally (no interest on capital, no salaries).
- The appropriation account (and credited to their current accounts).
- The old profit-sharing ratio.
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