Partnerships: the appropriation account and the Partnership Act

The partnership agreement

A partnership agreement usually sets out:

• the ratio in which residual profits and losses are shared;
• interest on capital (rewards partners who invest more);
• partners' salaries (rewards partners who work more or have more responsibility);
• interest on drawings (discourages early or large drawings);
• interest on partners' loans to the firm.

Salaries and interest on capital are appropriations of profit, not expenses. Interest on a partner's loan is an expense in the statement of profit or loss.

The appropriation account

Amira, Ben and Chen: appropriation account for the year ended 31 December 2025

Section 24 of the Partnership Act 1890

If there is no agreement (or it is silent on a point), section 24 applies:

• profits and losses are shared equally;
• no partners' salaries;
• no interest on capital;
• no interest charged on drawings;
• interest on partners' loans at 5% a year.

Exam questions often say 'there is no partnership agreement': apply these rules and remember the 5% loan interest is an expense before profit is shared.

Worked example

Using the agreement above, show how the residual profit is found and shared.

1. Profit 60,100 + interest on drawings 1,300 = 61,400.
2. Less interest on capital (5%): 8,000; less salaries 21,000. Residual = 32,400.
3. Shared 3 : 2 : 1: Amira 16,200, Ben 10,800, Chen 5,400.

Answer: Residual profit £32,400.

Check yourself

1. Profit for the year is £72,000. Interest on capital totals £6,000, salaries total £15,000 and interest on drawings totals £1,200. Calculate the residual profit.
   Show answer

   £52200. 72,000 + 1,200 - 6,000 - 15,000 = 52,200.

2. Residual profit of £52,200 is shared between X and Y in the ratio 3 : 2. Calculate X's share.
   Show answer

   £31320. 52,200 x 3/5 = 31,320.

3. P and Q have no partnership agreement. Profit before any loan interest is £45,000. P has lent the firm £20,000. How much profit does Q receive?
   Show answer

   £22000. Loan interest 5% x 20,000 = 1,000 (an expense to P). Remaining 44,000 shared equally: Q gets 22,000.

4. A partner has capital of £45,000. The agreement allows interest on capital at 6% a year. Calculate the interest on capital.
   Show answer

   £2700. 45,000 x 6% = 2,700.

5. Where is interest on a partner's loan to the firm shown?
   • In the appropriation account
   • As a deduction from the partner's capital
   • As an expense in the statement of profit or loss
   • As a drawing
   Show answer

   As an expense in the statement of profit or loss. A loan is a liability of the firm; its interest is a cost, charged before profit is appropriated.

6. Under section 24 of the Partnership Act 1890, which statement is correct?
   • No partner is entitled to a salary
   • Interest on capital is paid at 5%
   • Profits are shared in proportion to capital
   • Interest is charged on drawings at 5%
   Show answer

   No partner is entitled to a salary. Section 24 gives no salaries and no interest on capital; only loans earn 5%.

7. Explain why a partnership agreement may charge interest on drawings.
   Show answer

   Charging interest discourages partners from taking out large drawings early in the year, which keeps more cash in the business.. Say what it discourages and why that helps the firm.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.