Financial Statements of a Partnership — full notes
Paper No. 1: Financial Accounting · Financial Statements of a Partnership
Financial Statements of a Partnership
1. Why two accounts per partner?
A sole trader has one capital account that absorbs everything. A partnership splits this in two: Capital account — usually fixed, only moves on permanent contributions/withdrawals. Current account — the working account; profit share, interest, salary, and drawings flow through here every year.
2. The partnership agreement
Sets out: the profit-sharing ratio, whether partners earn interest on capital, whether any partner earns a salary, and whether interest is charged on drawings.
3. The appropriation account — structure
Net Profit (from the Statement of Profit or Loss)
Less: Interest on capital (each partner)
Less: Partners' salaries
= Residual profit
Residual profit split by the profit-sharing ratio
Total appropriated always equals the net profit exactly — a useful check on your workings, the same way Assets = Capital + Liabilities checks a Statement of Financial Position.
4. Worked example — Amina & Bakari
Capital: Amina KES 600,000, Bakari KES 400,000. Terms: 5% interest on capital; Bakari draws a salary of KES 60,000; residual shared 60:40. Net profit KES 350,000. Drawings: Amina KES 80,000, Bakari KES 70,000. First year (opening current accounts: nil).
Appropriation account:
| KES | |
|---|---|
| Net profit | 350,000 |
| Less interest on capital — Amina (600,000 x 5%) | (30,000) |
| Less interest on capital — Bakari (400,000 x 5%) | (20,000) |
| Less salary — Bakari | (60,000) |
| Residual profit | 240,000 |
| Amina's share (60%) | 144,000 |
| Bakari's share (40%) | 96,000 |
Check: 30,000 + 20,000 + 60,000 + 144,000 + 96,000 = 350,000 — matches net profit exactly.
Current accounts:
| Amina (KES) | Bakari (KES) | |
|---|---|---|
| Opening balance | 0 | 0 |
| Interest on capital | 30,000 | 20,000 |
| Salary | - | 60,000 |
| Share of residual profit | 144,000 | 96,000 |
| Less drawings | (80,000) | (70,000) |
| Closing balance | 94,000 | 106,000 |
Statement of Financial Position (capital section) — the only part that differs from a sole trader:
| KES | |
|---|---|
| Amina — capital account | 600,000 |
| Bakari — capital account | 400,000 |
| Amina — current account | 94,000 |
| Bakari — current account | 106,000 |
| Total capital section | 1,200,000 |
Everything above the capital section (non-current assets, current assets, current liabilities) is prepared exactly as for a sole trader. It's specifically the ownership section that expands from one line to a small table.
Full balancing check: assets of KES 1,285,000 and payables of KES 85,000 give Total assets 1,285,000 = Total capital section (1,200,000) + payables (85,000).