Partnership Accounts in FOA — Capital, Drawings & Profit Share

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Partnership accounts is one of the most formula-heavy topics in FOA — and one where students either score very well or drop marks entirely depending on whether they have practiced the structure. The good news: once you understand the Appropriation Account and Capital/Current Account framework, the questions become predictable.

What Are Partnership Accounts?

Partnership accounts record the financial transactions between business partners. Unlike a sole trader where only one owner's equity is tracked, a partnership must account for each partner's: capital contribution, share of profits (or losses), drawings, interest on capital, and salary (if applicable).

The Partnership Deed is the agreement that sets out profit-sharing ratios, partner salaries, interest on capital rates, and any other specific terms. If no partnership deed exists, the Partnership Act applies — which means equal profit sharing and no interest on capital or salaries.

The Appropriation Account

The Appropriation Account is prepared after the profit and loss account. It shows how the net profit is divided among partners according to the partnership deed.

APPROPRIATION ACCOUNT

Net Profit (from P&L) xxx

Less: Partner Salaries (xx)

Less: Interest on Capital (xx)

Residual Profit xx

Divided as per ratio:

Partner A (x%) xx

Partner B (x%) xx

Key Items in the Appropriation Account

• Partner salaries — treated as an expense before profit is shared (NOT the same as employee salaries)
• Interest on capital — rewards partners for the capital they have contributed
• Interest on drawings — charged to partners who have drawn excess amounts (reduces their share)
• Residual profit — what remains after salaries and interest; divided in the profit-sharing ratio

ICAP exam trap: If the appropriation account produces a net loss (e.g. salaries exceed profit), the loss is still shared in the profit-sharing ratio. Partners share losses as well as profits.

Capital Accounts vs Current Accounts

Partnerships typically maintain two types of accounts for each partner:

Capital Account

Records the permanent capital invested by each partner. This account is usually fixed and only changes when new capital is introduced or capital is withdrawn formally. Most partnerships use fixed capital accounts.

Current Account

Records the day-to-day movements in each partner's share of the business: profit shares added, drawings subtracted, salaries and interest on capital added, interest on drawings deducted.

PARTNER A — CURRENT ACCOUNT

Dr | Cr

Drawings 15,000 | Balance b/d 8,000

Int. on Draw. 1,500 | Salary 12,000

Balance c/d 16,500 | Int. on Cap. 3,000

33,000 | Profit Share 10,000

| 33,000

| Balance b/d 16,500

Worked Example

Partners Ali and Sara share profits 3:2. Net profit for the year is Rs. 90,000. Ali's salary Rs. 15,000. Interest on capital: Ali Rs. 6,000, Sara Rs. 4,000. Ali's drawings Rs. 20,000, Sara's drawings Rs. 12,000.

APPROPRIATION ACCOUNT

Net Profit 90,000

Less: Ali's Salary (15,000)

Less: Interest on Capital (10,000)

Residual Profit 65,000

Ali (3/5 x 65,000) 39,000

Sara (2/5 x 65,000) 26,000

Ali's total credit to Current A/c: 15,000 + 6,000 + 39,000 = Rs. 60,000

Sara's total credit to Current A/c: 4,000 + 26,000 = Rs. 30,000

Admission and Retirement of a Partner

ICAP FOA papers also test the admission of a new partner and the retirement of an existing one. Key concepts:

• Goodwill — revalued when a partner joins or leaves; shared in old profit ratio then adjusted
• Revaluation account — used to adjust asset values when partnership changes; gain/loss shared in old ratio
• Settlement of retiring partner's account — paid out in cash or loan account

Practice Partnership Accounts on Preptio

Partnership accounts is a topic that rewards practice above all else. The structure is consistent — once you have completed 20 to 30 questions on appropriation accounts and current accounts, the format becomes automatic.

• Hundreds of FOA MCQs covering partnership appropriation, capital, and current accounts
• Chapter-wise practice targeting only partnership questions
• Custom Quiz Builder for final-week drilling
• Instant feedback with worked solutions

Practice Partnership Accounts on Preptio → preptio.com

Disclaimer: Preptio is a practice supplement — not a replacement for textbook study. Always cover your ICAP-recommended material alongside platform practice.