Partnership capital and current accounts: worked examples

Method and where the marks are

Partnership questions test whether you can keep two kinds of partner account apart. Capital accounts record each partner's long-term investment. Under the fixed capital method they stay the same from year to year, unless a partner adds or withdraws capital.

Current accounts record everything that changes. This includes the partner's share of profit and any salary or interest on capital credited to them. It also includes the drawings and interest on drawings charged against them.

Mixing the two accounts is the most common structural error. Keeping them apart earns the presentation marks.

Learn the order. First prepare the appropriation account, which takes net profit and shares it out under the partnership agreement. Add interest on drawings, because it is charged to partners and so increases the profit available to share.

Then deduct what the agreement promises to partners: interest on capital and any partnership salaries. What remains is the residual profit, shared in the agreed profit-sharing ratio.

A frequent mistake is to share the whole net profit in the ratio before taking out interest on capital and salaries. Deal with the fixed entitlements first.

Interest on capital rewards the partner who invested more, so calculate it on the capital account balance, not the current account balance. If a partner has RM60,000 of capital and the agreement allows 5%, RM3,000 is credited to their current account.

Interest on drawings works the other way. It discourages early or heavy withdrawals. It is charged to the partner and credited back into the appropriation account. Read the question for the rate and the timing, because interest on drawings is sometimes calculated on each drawing for the period it was outstanding.

Partnership salaries are an appropriation of profit, not a business expense. Credit them to the partner's current account and never charge them in the income statement above net profit.

Then post the results to each partner's current account. On the credit side go the amounts owed to the partner: interest on capital, salary and share of residual profit. On the debit side go the amounts the partner owes back: drawings and interest on drawings.

Bring down the opening current account balance on its correct side. It is usually a credit balance, meaning the business owes the partner. The balancing figure carried down is the closing balance.

A closing debit balance is possible. It means the partner has drawn more than they earned. Present it as a debit balance and do not "correct" it.

In the statement of financial position, the capital accounts appear at their stable figures. The current accounts are shown separately, often in a small columnar working with each partner's opening balance, additions, drawings and closing balance side by side. The capital accounts plus the current accounts make up the capital section, which must equal net assets.

Avoid these traps. Do not put partners' salaries in the main income statement, because that understates net profit and throws out the appropriation. Do not calculate interest on capital from the current account balance.

Interest on drawings is added in the appropriation, not deducted. When the ratio is 3:2, apply it only to the residual profit after all fixed appropriations.

Check that the residual amounts credited to the two current accounts add back to the residual figure. If the appropriation does not fully allocate the available profit, you have missed an entry.

If you keep mixing up what goes in the capital account and what goes in the current account, we can help. One of our teachers can set both out side by side with you using one past-paper question. Book a trial class