ScotlandAccountingSyllabus dot point

How are profits, capital and changes of ownership accounted for when a business is owned by partners rather than a single proprietor or shareholders?

Prepare the accounts of a partnership - the appropriation of profit, partners' capital and current accounts - and account for changes in the partnership such as the admission or retirement of a partner, including the treatment of goodwill and the revaluation of assets.

A focused answer to the SQA Advanced Higher Accounting partnership content, covering the appropriation account, capital and current accounts, interest on capital and drawings, partners' salaries, and the treatment of goodwill and asset revaluation on the admission or retirement of a partner.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-16

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The appropriation account
Capital and current accounts
Changes in the partnership: goodwill and revaluation
Why this matters later
Try this

What this dot point is asking

The SQA wants you to account for a business owned by two or more partners. That means sharing profit through an appropriation account, maintaining each partner's capital and current accounts, and handling the trickier events of a partner joining or leaving, where goodwill and asset revaluation come into play. The arithmetic is methodical; the marks reward getting the order of steps right.

The appropriation account

The appropriation account is the partnership equivalent of deciding what happens to profit. It does not change the profit figure; it shares it out.

The order is what trips candidates up. Interest on capital and salaries are not expenses of the business - they are ways of rewarding partners before the residual split, so they come out of profit in the appropriation account, not in the profit or loss. Interest on drawings is added to the profit available because it is a charge on the partner for taking money out.

Share profit with all the appropriations

Start from net profit

Net profit is GBP 100,000. Partners P and Q share residual profit 2:3.

Deduct salaries and interest on capital

P's salary is GBP 12,000, interest on capital is GBP 5,000 (P) and GBP 4,000 (Q). Total deducted: $12{,}000 + 5{,}000 + 4{,}000 = 21{,}000$ .

Add interest on drawings

P is charged GBP 1,000 and Q GBP 1,500 interest on drawings, so add GBP 2,500 back: profit available for sharing $= 100{,}000 - 21{,}000 + 2{,}500 = 81{,}500$ .

Split the residual

P: $\frac{2}{5} \times 81{,}500 = 32{,}600$ ; Q: $\frac{3}{5} \times 81{,}500 = 48{,}900$ . Total to P including salary and interest: $12{,}000 + 5{,}000 + 32{,}600 - 1{,}000 = 48{,}600$ .

Capital and current accounts

Most partnerships keep capital fixed and let routine movements flow through a separate current account.

Separating the two keeps the long-term investment distinct from the year-to-year rewards, which makes admission, retirement and dissolution calculations cleaner.

Changes in the partnership: goodwill and revaluation

When the ownership changes, two adjustments protect fairness between old and new partners.

The standard goodwill treatment has two steps. First, credit goodwill to the old partners in the old profit-sharing ratio, recognising the value they created. Then, if goodwill is not to be carried in the books (the usual exam instruction), write it off by debiting all partners in the new ratio. The net effect transfers value from the incoming partner to the existing ones. Assets may also be revalued to current values, with the surplus or deficit credited or debited to the old partners in the old ratio before the change.

Revalue assets on a partner's retirement

Establish the revaluation surplus

On the retirement of R, property is revalued upward by GBP 30,000 and inventory written down by GBP 4,000, a net surplus of $30{,}000 - 4{,}000 = 26{,}000$ .

Credit the old partners in the old ratio

R, S and T shared 3:2:1. The surplus is credited: R $\frac{3}{6} \times 26{,}000 = 13{,}000$ , S $\frac{2}{6} \times 26{,}000 = 8{,}667$ , T $\frac{1}{6} \times 26{,}000 = 4{,}333$ .

Settle the retiring partner

R's capital account, now including the revaluation credit and any goodwill share, is the amount owed to R on leaving, settled in cash or transferred to a loan account. The remaining partners continue with the revalued assets in the books.

Why this matters later

Partnership accounting reinforces the discipline of working from a clear set of rules to a balanced result, the same discipline you need for limited company statements. It also sharpens your interpretation skills: the split of profit, the size of drawings and the level of capital all feed into how a partnership's performance is judged. Understanding goodwill here also helps when the regulatory framework discusses intangible assets in the limited company context.

Try this

Q1. Net profit is GBP 60,000. Interest on capital totals GBP 6,000 and there are no salaries or interest on drawings. Partners share residual profit 1:1. Find each partner's residual share. [3 marks]

Cue. Residual $= 60{,}000 - 6{,}000 = 54{,}000$ ; each receives GBP 27,000.

Q2. Goodwill of GBP 40,000 is credited to old partners M and N (ratio 1:1) and then written off among M, N and the new partner O in the ratio 2:1:1. State O's goodwill debit. [3 marks]

Cue. $\frac{1}{4} \times 40{,}000 = 10{,}000$ debited to O.

Exam-style practice questions

Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

AH style: appropriation7 marksA and B share profits 3:2. Net profit is GBP 84,000. A is entitled to interest on capital of GBP 4,000 and B GBP 3,000. A receives a salary of GBP 10,000. Prepare the appropriation of profit and state each partner's share of residual profit.

Show worked answer →

Begin with net profit GBP 84,000. Deduct the appropriations that come before profit sharing: interest on capital $4{,}000 + 3{,}000 = 7{,}000$ and A's salary GBP 10,000, a total of GBP 17,000 (3 marks).

Residual profit is $84{,}000 - 17{,}000 = 67{,}000$ , shared 3:2. A's share is $\frac{3}{5} \times 67{,}000 = 40{,}200$ and B's share is $\frac{2}{5} \times 67{,}000 = 26{,}800$ (3 marks).

Total to A: $4{,}000 + 10{,}000 + 40{,}200 = 54{,}200$ ; total to B: $3{,}000 + 26{,}800 = 29{,}800$ (1 mark). Markers reward appropriations deducted before sharing, the correct residual split, and accurate totals.

AH style: goodwill on admission6 marksX and Y share profits equally. Goodwill is valued at GBP 60,000 and is not to be retained in the books. Z is admitted and the new partners X, Y and Z will share profits 2:2:1. Show the goodwill adjustment entries for each partner's capital account.

Show worked answer →

Goodwill is first credited to the old partners in their old ratio (1:1), so X and Y each receive $\frac{1}{2} \times 60{,}000 = 30{,}000$ credited to their capital accounts (3 marks).

Because goodwill is not retained, it is then written off by debiting all partners in the new ratio 2:2:1. X is debited $\frac{2}{5} \times 60{,}000 = 24{,}000$ , Y $\frac{2}{5} \times 60{,}000 = 24{,}000$ and Z $\frac{1}{5} \times 60{,}000 = 12{,}000$ (3 marks). Net effect: X up $30{,}000 - 24{,}000 = 6{,}000$ , Y up GBP 6,000, Z down GBP 12,000, reflecting the value Z buys into. Markers reward crediting in the old ratio then writing off in the new ratio.

Related dot points

Sources & how we know this

SQA Advanced Higher Accounting Course Specification — SQA (2025)