Partnerships - Part 2

In a partnership, each partner maintains two separate ledger accounts:

1. Capital account The capital account records the fixed capital contribution made by the partner — the permanent investment they have put into the business. This account rarely changes during a normal year. It only changes when:

• The partner introduces additional capital.
• The partner permanently withdraws capital.
• A new partner joins and goodwill is adjusted.

Because it is fixed, the capital account is NOT used for day-to-day items like profit shares or drawings.

2. Current account The current account is a running account that records everything that flows between the partner and the partnership during the year:

Dr (reduces partner's balance)	Cr (increases partner's balance)
Drawings	Partners' salary
Interest on drawings	Interest on capital
Share of loss	Share of profit
Balance c/d (if credit balance)	Balance b/d (if credit balance)

The current account balance at the year end represents the net amount the partnership owes to the partner (credit balance) or the partner owes to the partnership (debit balance).

Why keep them separate? Keeping capital and current accounts separate makes it easy to see each partner's fixed capital investment (important for calculating interest on capital) versus their running entitlements and drawings.

Partners' current accounts are prepared in T-account (ledger) format at the end of each year. Below is the standard format:

Dr         Partner A — Current Account         Cr
Date  Details          $    Date  Details            $
      Drawings       X 000        Balance b/d       X 000
      Int. on        X 000        Salary            X 000
       drawings                   Int. on capital   X 000
      Balance c/d    X 000        Share of profit   X 000
                    ______                          ______
                    X 000                           X 000
                                  Balance b/d       X 000

Key entries — Dr side (reduce partner's entitlement):

• Drawings (cash and goods taken for personal use)
• Interest on drawings
• Share of loss (if profit available is negative)
• Balance c/d — written on the debit side if the account has a credit balance

Key entries — Cr side (increase partner's entitlement):

• Salary (from appropriation account)
• Interest on capital (from appropriation account)
• Share of profit (from appropriation account)
• Opening balance b/d (if credit balance from prior year)

Opening balance:

• If the prior year ended with a credit balance, it is brought forward as a credit (Cr) on the new year's account.
• If the prior year ended with a debit balance (overdrawn), it is brought forward as a debit (Dr).

After all entries, the account is balanced in the usual way. The closing balance is carried down (c/d) and then brought forward (b/d) to start the next year.

The statement of financial position for a partnership is structured the same as for a sole trader for the assets and liabilities sections. The difference is in the capital section at the bottom, which must reflect all partners' accounts.

Capital section format:

Capital accounts:                  Partner A    Partner B    Total
                                       $            $          $
Capital accounts                    60 000       40 000     100 000
Current accounts                     4 200        2 800       7 000
Total capital                       64 200       42 800     107 000

Notes on the capital section:

• Show the capital account balance and current account balance for EACH partner.
• Add them together to get each partner's total equity in the business.
• The sum of all partners' total equity must equal net assets.

Debit balance on current account: If a partner has a debit (overdrawn) balance on their current account, it is deducted from their capital account in the SFP:

Partner B
  Capital account          40 000
  Less: Current account    (1 500)   ← debit balance — deducted
                           38 500

This debit balance reduces the partner's total equity in the partnership.