How is the profit of a partnership shared between the partners, and how are the appropriation account and the capital and current accounts prepared?
Preparation of the partnership appropriation account and partners' capital and current accounts, including interest on capital, interest on drawings, partners' salaries and the division of residual profit in the agreed profit-sharing ratio.
A focused answer to the SQA Higher Accounting partnership content, covering the appropriation account, interest on capital and drawings, partners' salaries, sharing residual profit in the agreed ratio, and the difference between fixed capital accounts and fluctuating current accounts.
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What this dot point is asking
The SQA wants you to share a partnership's profit between the partners according to their agreement, and to record the result in the appropriation account and in each partner's capital and current accounts. You must handle interest on capital, interest on drawings, salaries and the division of the residue in the profit-sharing ratio.
Why partnerships need extra accounts
A partnership has two or more owners, so profit cannot simply be added to one capital figure. The partners' agreement sets out how profit is shared, and the accounts must apply it fairly. The appropriation account does the sharing; the capital and current accounts record each partner's stake. If there is no agreement on a point, the Partnership Act default of sharing profits and losses equally, with no interest or salary, applies.
The appropriation account
Interest on capital and salaries reduce the profit available to share, because they are amounts owed to partners before the residue is split. Interest on drawings increases the profit available, because it is charged to partners for drawing money out, effectively returning value to the pool.
Capital and current accounts
Most Higher questions use fixed capital accounts. The capital account holds the partner's permanent investment and changes only when capital is put in or taken out. The current account holds the running items: it is credited with the partner's share of residual profit, interest on capital and salary, and debited with drawings and interest on drawings. A credit balance on the current account is money the partner has earned but not yet drawn; a debit balance means they have overdrawn.
Statement of financial position
In the statement of financial position the capital accounts are shown at their fixed balances and the current account balances are listed beside them, added if in credit and deducted if overdrawn. The total of capital plus current accounts is the partners' total equity in the business.
Try this
Q1. Profit is £30,000, interest on capital totals £4,000 and one salary is £6,000. There is no interest on drawings. Calculate the residual profit. [2 marks]
- Cue. £30,000 - £4,000 - £6,000 = £20,000.
Q2. A residue of £20,000 is shared 3:1. Calculate each partner's share. [2 marks]
- Cue. £15,000 and £5,000.
Q3. State where a partner's drawings are recorded when fixed capital accounts are used. [1 mark]
- Cue. Debited to the partner's current account.
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.
SQA Higher style6 marksAnna and Ben are partners with capitals of £60,000 and £40,000. The agreement allows 5% interest on capital, a salary of £12,000 to Ben, and the residue shared 3:2. Interest on drawings is £1,000 for Anna and £600 for Ben. Profit for the year is £50,000. Calculate the residual profit and each partner's total share of profit.Show worked answer →
Interest on capital: Anna 5% of £60,000 = £3,000; Ben 5% of £40,000 = £2,000 (1 mark).
Appropriations against profit so far: interest on capital £5,000 + Ben's salary £12,000 = £17,000. Add back interest on drawings £1,000 + £600 = £1,600, which increases profit available (1 mark).
Residual profit = £50,000 + £1,600 - £17,000 = £34,600 (1 mark). Shared 3:2: Anna = (3/5) x £34,600 = £20,760; Ben = (2/5) x £34,600 = £13,840 (1 mark).
Total share: Anna = £3,000 interest + £20,760 - £1,000 drawings interest = £22,760; Ben = £2,000 + £12,000 + £13,840 - £600 = £27,240 (2 marks). Markers reward interest on capital, the residue, the ratio split and each partner's total.
SQA Higher style3 marksExplain the difference between a partner's capital account and current account when fixed capital accounts are used, and state where interest on capital and drawings are recorded.Show worked answer →
With fixed capital accounts, the capital account holds the partner's permanent investment and changes only when capital is introduced or withdrawn (1 mark).
The current account holds the running, fluctuating items: the partner's share of profit, interest on capital and salary are credited to it, and drawings and interest on drawings are debited to it (1 mark).
So interest on capital is credited to the current account and interest on drawings is debited to the current account, leaving the capital account unchanged (1 mark). Markers reward the fixed-versus-fluctuating distinction and the correct location of each item.
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Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)