When two or more people run a business together to make a profit, the business is a partnership. The accounting is the same as for a sole trader with one important difference: the profit does not belong to one owner, so it has to be shared out, and each partner’s capital and profit must be recorded separately.
This topic covers how a partnership shares its profit, using salaries, interest on capital and a profit-sharing ratio, and how the capital and current accounts record each partner’s interest.
It follows the statements topics, because partnership accounts use the same profit or loss and statement of financial position, adding an appropriation account below profit. It is a regular source of 20-mark questions and Section A items in the diets. The next topic covers changes in a partnership, including goodwill.
In 30 seconds
With no agreement, the Partnership Act 1890 says profits and losses are shared equally, no interest is paid on capital or current accounts, no partner gets a salary, and a partner’s advance beyond the agreed capital earns 5% interest. A Partnership deed can change all of these.
Profit is shared in the Appropriation account in this order: Notional salaries, then Notional interest on capital, then the Residual in the profit-sharing ratio (PSR). Salaries and interest on capital are not expenses. They are shares of profit. A Guaranteed minimum is topped up by the other partners in their PSR. Capital accounts hold fixed capital. Current accounts hold the share of profit less drawings.
If the sharing terms change during the year, split the profit by time.
What a partnership is
A partnership is “the relation which subsists between persons carrying on a business in common with a view of profit”. It needs an association of two or more persons, an agreement made by all of them, an agreement to share the profits, and a business carried on by all or any of them acting for all. Partnerships in Nigeria are governed by the Partnership Act 1890, amended for Lagos in 2011. The partners together are the firm.
If the partners have no agreement, the Act supplies these rules:
- All profits and losses are shared equally.
- No interest is allowed on capital or current accounts.
- No partner is paid a salary.
- An advance or loan above the agreed share of capital earns interest at 5% a year.
In practice the Partnership deed sets the terms. A good deed covers the capital each partner contributes, the profit-sharing ratio, salaries, interest on capital and drawings, how a partner may join or leave, the valuation of goodwill, and how disputes are settled. The financial statements are the same as a sole trader’s except for the capital section.
Capital and current accounts
Each partner usually has two accounts.
| Account | What it records |
|---|---|
| Capital account | Fixed, long-term capital that the partner must leave in the business. The balance changes only when the partners agree to change it, for example on a new capital contribution. |
| Current account | The partner’s accumulated profit and drawings. The share of profit is credited and drawings are debited (Dr Current account, Cr Bank). The partner may draw the balance out. |
A partner’s loan to the firm is not capital. It is a liability, shown as a non-current liability, and its interest is an expense in profit or loss, unlike notional interest on capital, which is a share of profit.
Sharing the profit
The profit for the year is found as for a sole trader and transferred to an appropriation account, where it is divided and credited to the partners’ current accounts. The partners are free to choose how, as set out in the deed.
1. Profit-sharing ratio only. The WXY Partnership shares in the ratio 3:5:8 and makes ₦1,920,000. The total is 16 parts: W gets 3/16, or ₦360,000, X gets 5/16, or ₦600,000, and Y gets 8/16, or ₦960,000. The entry is Dr Profit or loss, Cr Appropriation ₦1,920,000, then Dr Appropriation, Cr each partner’s current account.
2. Notional salaries. A salary recognises different work. It is a share of profit, not a business expense, and need not be paid in cash, because the partner draws money through drawings. In the PQR Partnership the residual is shared 4:3:2 after a salary of ₦30,000 to R, and the profit is ₦345,000. The residual is 315,000, so P gets 140,000, Q gets 105,000 and R gets 70,000 plus the salary of 30,000, which is 100,000.
3. Notional interest on capital. Interest on the balance of a partner’s capital account is a share of profit because capital is equity, not a liability. In the DEF Partnership, D has capital of ₦100,000, E ₦120,000 and F ₦60,000, with salaries of ₦4,000 to D and ₦7,000 to F, interest at 5%, and a residual shared 3:5:2. Profit is ₦95,000.
| ₦ | Total | D | E | F |
|---|---|---|---|---|
| Salaries | 11,000 | 4,000 | 7,000 | |
| Interest at 5% | 14,000 | 5,000 | 6,000 | 3,000 |
| Residual 70,000 in 3:5:2 | 70,000 | 21,000 | 35,000 | 14,000 |
| Profit share | 95,000 | 30,000 | 41,000 | 24,000 |
4. Guaranteed minimum. Share the profit by the agreement first, ignoring the guarantee. If a partner’s share is below the guaranteed minimum, the other partners make up the shortfall from their shares in their profit-sharing ratio. In the XYZ Partnership, X has a salary of ₦20,000 and the residual is shared 2:4:6, with Y guaranteed ₦32,000.
On a profit of ₦80,000 the residual is 60,000, giving X 10,000, Y 20,000 and Z 30,000, so X totals 30,000, Y 20,000 and Z 30,000. Y is ₦12,000 short, which X and Z bear in the ratio 2:6, so X gives up 3,000 and Z gives up 9,000. The final shares are X 27,000, Y 32,000 and Z 21,000.
5. Change in terms during the year. Split the profit by time between the old and new arrangements, and share each part under its own terms. The DEF Partnership has salaries of ₦30,000 each to D and F and a ratio of 3:5:2 for six months, then D’s salary rises to ₦40,000 and the ratio becomes 1:3:1. The profit is ₦220,000 earned evenly.
First half: 110,000, salaries 15,000 each, residual 80,000 gives D 24,000, E 40,000, F 16,000, so D 39,000, E 40,000, F 31,000. Second half: 110,000, salaries D 20,000 and F 15,000, residual 75,000 in 1:3:1 gives D 15,000, E 45,000, F 15,000, so D 35,000, E 45,000, F 30,000. For the year: D 74,000, E 85,000, F 61,000.
Profits, drawings and current accounts
Each partner’s share of profit is added to the current account and drawings are deducted. Example (ABC Partnership). Capital accounts are A ₦100,000, B ₦200,000 and C ₦160,000, and opening current accounts are A ₦6,000, B ₦3,000 and C ₦8,000. Profit is ₦103,000, with salaries of ₦17,000 to A and ₦15,000 to C, interest on capital at 5%, and a residual in the ratio 1:3:2. Drawings are A ₦20,000, B ₦25,000 and C ₦40,000.
| ₦ | A | B | C |
|---|---|---|---|
| Salaries | 17,000 | 15,000 | |
| Interest at 5% on capital | 5,000 | 10,000 | 8,000 |
| Residual 48,000 in 1:3:2 | 8,000 | 24,000 | 16,000 |
| Profit share | 30,000 | 34,000 | 39,000 |
| Opening current account | 6,000 | 3,000 | 8,000 |
| Drawings | (20,000) | (25,000) | (40,000) |
| Closing current account | 16,000 | 12,000 | 7,000 |
In the statement of financial position, the capital section lists each partner’s capital account and current account balance. A debit balance on a current account means the partner has drawn more than has been earned.
The ideas in more depth
Background. A deed may also charge interest on drawings, which is credited in the appropriation account and debited to the partners’ current accounts. Where only the profit is shared by the ratio, interest on capital and salaries are skipped. The partnership deed always overrides the Act. Interest on capital is usually calculated on the fixed capital balances, as in the DEF and ABC examples, and the question will say which.
In the exam, a question may ask for the provisions of the Act that apply in the absence of an agreement (November Diet 2020, Question 6(a)), or for ten provisions that a deed should contain (May Diet 2018, Question 5(b)).
Worked example: Okene Partners
Scenario. X, Y and Z are in partnership. Fixed capital is X ₦1,000,000, Y ₦800,000 and Z ₦600,000. Profit for the year is ₦2,240,000. Y has a salary of ₦200,000. Interest is 10% on capital. The residual is shared 3:2:1. Opening current accounts: X ₦40,000 credit, Y ₦20,000 debit and Z ₦30,000 credit. Drawings: X ₦700,000, Y ₦600,000 and Z ₦300,000. Z is guaranteed a minimum profit share of ₦400,000, and X and Y bear any shortfall in the ratio 3:2. Required: the profit shares and the closing current accounts.
- Interest. X 100,000, Y 80,000, Z 60,000, a total of 240,000.
- Residual.
2,240,000 − 200,000 − 240,000 = 1,800,000.
In 3:2:1: X 900,000, Y 600,000, Z 300,000. - Profit shares before the guarantee.
X 100,000 + 900,000 = 1,000,000.
Y 200,000 + 80,000 + 600,000 = 880,000.
Z 60,000 + 300,000 = 360,000. - Guarantee. Z is 40,000 short.
X bears 3/5 = 24,000 and Y bears 2/5 = 16,000.
Final shares: X 976,000, Y 864,000, Z 400,000.
The total is still 2,240,000. - Current accounts.
X: 40,000 + 976,000 − 700,000 = 316,000 credit.
Y: −20,000 + 864,000 − 600,000 = 244,000 credit.
Z: 30,000 + 400,000 − 300,000 = 130,000 credit.
Common mistakes in the exam
- Treating partners’ salaries or interest on capital as business expenses, which reduces profit. They are appropriations.
- Sharing the profit in the ratio before deducting salaries and interest.
- Calculating interest on capital from the current account balances rather than the capital accounts, unless the question says so.
- Charging drawings to the capital account rather than the current account.
- Forgetting that a partner’s loan interest is an expense, not an appropriation.
- Applying a guaranteed minimum before sharing the residual, or sharing the shortfall equally instead of in the ratio.
- Not splitting the profit by time when terms change during the year.
- Mixing up debit and credit balances on the current accounts.
Quick revision
- No agreement: equal shares, no salary, no interest on capital, 5% on extra advances.
- Appropriation order: salaries, interest on capital, residual in the ratio. Guarantee afterwards.
- Capital account is fixed. Current account = opening + profit share − drawings.
- Terms changed mid-year: split profit by time.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. Where there is no partnership agreement, profits are shared:
- In the ratio of capital
- Equally
- By time worked
- In the ratio of salaries
Show the answer
B. The Partnership Act 1890 provides for equal sharing.
Question 2. Without an agreement, a partner’s advance above the agreed capital earns interest at:
- Nil
- 2.5%
- 10%
- 5%
Show the answer
D. Interest of 5% a year applies to such advances.
Question 3. The double entry for a partner’s drawings is:
- Dr Current account, Cr Bank
- Dr Bank, Cr Current account
- Dr Appropriation, Cr Bank
- Dr Capital account, Cr Bank
Show the answer
A. Drawings reduce the partner’s current account.
Question 4. The balance on a partner’s fixed capital account changes when:
- Profit is shared
- Drawings are taken
- New capital is introduced or capital is repaid by agreement
- A salary is credited
Show the answer
C. Profit, drawings and salaries go through the current account.
Question 5. A partner’s notional salary is:
- An expense of the business
- A share of profit shown in the appropriation account
- A liability
- Drawings
Show the answer
B. It is an appropriation of profit, not an expense.
Question 6. Profit is ₦345,000. R is allowed a salary of ₦30,000 and the residual is shared 4:3:2 between P, Q and R. P’s total share is:
- ₦115,000
- ₦120,000
- ₦100,000
- ₦140,000
Show the answer
D. Residual = 315,000. P = 4/9 × 315,000 = 140,000.
Question 7. A, B and C share 2:2:1. B has a salary of ₦100,000 and C ₦150,000, and profit is ₦1,000,000. A’s share is:
- ₦200,000
- ₦400,000
- ₦300,000
- ₦250,000
Show the answer
C. Residual = 750,000. A = 2/5 × 750,000 = 300,000.
Question 8. Interest at 5% on a partner’s capital of ₦100,000 is shown in:
- The appropriation account
- Profit or loss as an expense
- The statement of financial position only
- Drawings
Show the answer
A. Interest on capital is a share of profit, an appropriation.
Question 9. Y is guaranteed ₦32,000 but the sharing gives ₦20,000. The ₦12,000 shortfall is borne by:
- Y
- X only
- Z only
- The other partners in their profit-sharing ratio
Show the answer
D. The other partners make it up from their shares in their ratio.
Question 10. Interest of ₦6,000 on a partner’s loan to the firm is:
- An appropriation of profit
- An expense in profit or loss
- Credited to capital only
- Not recorded
Show the answer
B. A loan is a liability, so its interest is a finance cost.
Section B style: written questions
Question 11 (10 marks). (a) State four rules of the Partnership Act 1890 that apply when there is no partnership agreement. (4 marks) (b) Distinguish a partner’s capital account from the current account. (6 marks)
Question 12 (20 marks). A, B and C are in partnership with fixed capital of ₦600,000, ₦500,000 and ₦400,000. Profit for the year is ₦1,780,000. A has a salary of ₦150,000 and C has ₦100,000. Interest is 8% on fixed capital and the residual is shared 3:2:1. B is guaranteed a minimum of ₦540,000, with the shortfall borne equally by A and C. Opening current accounts: A ₦20,000 credit, B ₦10,000 debit, C ₦30,000 credit. Drawings: A ₦600,000, B ₦450,000, C ₦300,000.
(a) Prepare the appropriation account. (10 marks) (b) Prepare the partners’ current accounts. (10 marks)
A further written question
Question 13 (10 marks). P and Q share profits equally with no salaries for the first six months. From 1 July Q has a salary of ₦60,000 a year and the ratio becomes 2:1. Profit for the year is ₦420,000, earned evenly. Show the total share of each partner. (10 marks)
Model answers
Show the model answer to Question 11
(a) Profits and losses are shared equally. No interest is allowed on capital or current accounts. No partner is paid a salary. An advance above the agreed capital earns 5% a year. (b) The capital account records the fixed, long-term capital the partner has contributed and must leave in the business. Its balance changes rarely, and normally only by agreement.
The current account records the partner’s accumulated profit share, salary and interest, less drawings. It changes every year and may be drawn on. A debit balance means the partner has overdrawn.
Show the model answer to Question 12
(a) Profit 1,780,000. Salaries: A 150,000, C 100,000, total 250,000. Interest at 8%: A 48,000, B 40,000, C 32,000, total 120,000. Residual = 1,780,000 − 370,000 = 1,410,000, shared 3:2:1: A 705,000, B 470,000, C 235,000. Shares before the guarantee: A 903,000, B 510,000, C 367,000. B is guaranteed 540,000, so the shortfall is 30,000, borne equally: A 15,000 and C 15,000. Final shares: A 888,000, B 540,000, C 352,000. Total 1,780,000.
(b)
- A: 20,000 + 888,000 − 600,000 = 308,000 credit.
- B: −10,000 + 540,000 − 450,000 = 80,000 credit.
- C: 30,000 + 352,000 − 300,000 = 82,000 credit.
Show the model answer to Question 13
First six months: profit 210,000, shared equally: P 105,000 and Q 105,000. Second six months: profit 210,000. Q’s salary for six months is 30,000. Residual = 180,000 shared 2:1: P 120,000, Q 60,000, so Q 90,000. Total: P 105,000 + 120,000 = ₦225,000. Q 105,000 + 90,000 = ₦195,000. The total is ₦420,000.
Pathfinder on Partnership accounts: profit sharing, capital and current accounts
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. Asks what interest a partner’s capital contribution above the agreed amount earns where there is no agreement, and which item is not stated in the Partnership Act 1890.
Revise first: What a partnership is
From the previous syllabus. Asks where a partner’s accumulated profits are recorded, where a loan advanced by a partner is shown, and the double entry for partners’ drawings.
Revise first: Capital and current accounts
From the previous syllabus. Gives partners’ capital contributions, a profit-sharing ratio after salaries and interest on capital, or equal sharing with opening balances, and asks for a partner’s share of profit and the balance on a current account.
Revise first: Sharing the profit
From the previous syllabus. Gives a partnership profit shared in a ratio, and a minimum profit share guaranteed to one partner by the others. Asks for a partner’s share after the guarantee.
Revise first: Sharing the profit
From the previous syllabus. A partnership shares profit in a ratio after salaries to each partner. Asks for the statement of profit or loss and appropriation, with a new partner admitted during the year on a pro rata time basis, and the partners’ current accounts.
Revise first: Sharing the profit
From the previous syllabus. Asks for the sharing of profit where a partner receives commission, a salary and interest on fixed capital, and, in the larger question, the statement of profit or loss and statement of financial position of the partnership.
Revise first: Profits, drawings and current accounts
Asks for the profit or loss appropriation account, the partners’ current and capital accounts and a statement of financial position extract, and, in the later question, how profit is shared between partners, the partners’ initial capital and the capital and current accounts.
Revise first: Profits, drawings and current accounts
From the previous syllabus. Asks you to outline six general rules between partners where there is no agreement, and to state ten provisions that a partnership agreement should contain.
Revise first: What a partnership is
Source: ICAN Pathfinder, Financial Accounting. Diets covered: November Diet, 2014, May Diet, 2015, November Diet, 2015, November Diet, 2016, May Diet, 2017, November Diet, 2017, May Diet, 2018, November Diet, 2018, November Diet, 2019, November Diet, 2020, May Diet, 2021, November Diet, 2021, November Diet, 2022, May Diet, 2023 and November Diet, 2023 (the later ones are not all on the previous syllabus). Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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