Partnerships &
Adjustments
Capital accounts, profit appropriation and year-end adjustments - the three building blocks of partnership accounting.
Struggling with the appropriation account? Book a session with Dineo.
Book Now →A partnership is a business with TWO OR MORE owners (partners) who each contribute capital, share profits and losses according to an agreed ratio, and are jointly and personally liable for the debts of the business. Governed by the Partnership Act.
Advantages
- More capital available from multiple partners
- Shared skills, expertise and responsibilities
- Shared risks - losses distributed between partners
- Simple and inexpensive to set up
- Partners motivate and hold each other accountable
Disadvantages
- Unlimited personal liability - personal assets at risk for business debts
- Disagreements between partners can paralyse decisions
- Profits must be shared even if one partner contributes more
- Partnership dissolves if a partner leaves or dies
- Harder to raise very large amounts of capital
What the Partnership Agreement Must Include
The most tested disadvantage. Unlimited personal liability means if the business cannot pay its debts, creditors can go after the partners' personal assets - their homes, cars, savings. This is why many businesses eventually convert to a company (Pty) Ltd where liability is limited.
Think of the capital account as the original deposit you make into a fixed savings account - it stays there and does not change. The current account is like your everyday cheque account - salary allowances go in, drawings come out, your share of profit comes in. All the daily activity runs through the current account while capital sits fixed.
Capital Account
| Dr (decreases) | Cr (increases) |
|---|---|
| Withdrawal of capital | Initial capital contribution |
| Additional capital invested |
Current Account
| Dr (reduces balance) | Cr (increases balance) |
|---|---|
| Drawings taken out | Salary allowance |
| Interest on drawings | Interest on capital |
| Share of loss | Share of profit |
Dr side: D.I.L. | Cr side: S.I.P.
Drawings Interest on drawings Loss share | Salary allowance Interest on capital Profit shareKey Rules
In the exam, always balance the T-account. Add up both sides - the difference is either a closing credit balance (normal) or a debit balance (partner overdrawn). Show the balance carried down on the larger side and brought down on the smaller side.
Appropriation means dividing the net profit among the partners. It always follows the same sequence: salary allowances first, then interest on capital, then whatever is left is shared in the agreed profit-sharing ratio. All amounts end up in each partner's current account.
Start with Net Profit
Take the net profit figure from the Income Statement. This is the starting point for the appropriation account.
Deduct Salary Allowances
Salary allowances are deducted first, per the partnership agreement. NOT the same as salaries paid to employees. Goes to the Cr side of each partner's current account.
Deduct Interest on Capital
Calculate interest as: each partner's capital balance x the agreed rate %. Goes to the Cr side of each partner's current account.
Calculate Remaining Profit (or Loss)
Net Profit less Salary Allowances less Interest on Capital = Remaining profit. This could be negative if the first two items exceed net profit.
Share Remaining in Agreed Ratio
Split the remaining profit between partners in their agreed ratio (e.g. 3:2 means Partner A gets 3/5, Partner B gets 2/5). If the remaining is a LOSS, each partner bears their share of the loss.
Transfer to Current Accounts
Every amount in the appropriation account moves to each partner's current account. The appropriation account must balance to zero at the end.
Profit and Loss Appropriation Account Layout
| Dr - Distributions | Cr - Source |
|---|---|
| Salary: Partner A R80 000 | Net Profit R360 000 |
| Salary: Partner B R60 000 | |
| Interest on capital: A R30 000 | |
| Interest on capital: B R24 000 | |
| Profit share A (3/5) R99 600 | |
| Profit share B (2/5) R66 400 | |
| Total R360 000 | Total R360 000 |
What Happens if Remaining Profit is Negative?
Dr total = Cr total = Net Profit. If it does not balance, check: did you include ALL salary allowances? Did you calculate interest on the correct capital balance? Did you split the remainder correctly? Show all working for the interest on capital calculation (e.g. 15% x R200 000 = R30 000).
All income and expenses must be recorded in the period they BELONG TO - not just when cash moves. Year-end adjustments correct the trial balance figures to reflect this. They change net profit, which then changes the amount available for appropriation.
Accrued Expense
Expense incurred this year but NOT YET PAID. We have paid too little.
Dr Expense | Cr Accrued Expenses SFP: Current Liability (Note 9)Prepaid Expense
Expense PAID in advance for next year. We have paid too much.
Dr Prepaid Expenses | Cr Expense SFP: Current Asset (Note 5)Accrued Income
Income earned this year but NOT YET RECEIVED. We have received too little.
Dr Accrued Income | Cr Income account SFP: Current Asset (Note 5)Income Received in Advance
Income received that belongs to NEXT year. We have received too much.
Dr Income account | Cr Income in Advance SFP: Current Liability (Note 9)Depreciation
Bad Debts and Allowance for Bad Debts
| Adjustment | Goes to SCI as | Goes to SFP as | Effect on Profit |
|---|---|---|---|
| Accrued expense | Increases expense | Current Liability | Reduces |
| Prepaid expense | Reduces expense | Current Asset | Increases |
| Accrued income | Increases income | Current Asset | Increases |
| Income in advance | Reduces income | Current Liability | Reduces |
| Depreciation | Increases expense | Reduces asset CV | Reduces |
| Bad debts written off | Increases expense | Reduces debtors | Reduces |
| Allowance increases | Increases expense | Reduces net debtors | Reduces |
| Allowance decreases | Reduces expense | Increases net debtors | Increases |
The adjusted net profit is what goes into the appropriation account. If you skip an adjustment, your net profit figure is wrong, your appropriation account will not balance, and both partners' current accounts will be incorrect. Do adjustments first, every time.
Quick Reference
Rules to Never Forget
Capital Account
FIXED. Only changes with formal capital contribution or withdrawal.
Current Account Cr
Salary allowance, Interest on capital, Share of profit.
Current Account Dr
Drawings, Interest on drawings, Share of loss.
Appropriation Order
1. Salaries → 2. Interest on capital → 3. Share remainder in ratio.
Adjustments First
Process ALL year-end adjustments before the appropriation account.
Net Debtors
Debtors Control minus Allowance for Bad Debts. Net figure only on SFP.
Appropriation account
not balancing?
Work through a full partnership question with Dineo - journal entries, current accounts and the appropriation account all in one session.