Why is "Adding salaries and interest on capital instead of deducting them" a common mistake in Financial Statements for Partnerships?

Why it happens: Confusing rewards with charges. How to avoid it: Salaries and interest on capital are DEDUCTED before sharing; interest on drawings is ADDED. Source: 9706 Examiner Reports

Why is "Deducting interest on drawings in the appropriation account" a common mistake in Financial Statements for Partnerships?

Why it happens: Treating it like a salary. How to avoid it: Interest on drawings INCREASES the profit to share, so it is ADDED in the appropriation account. Source: 9706 Examiner Reports

Why is "Putting a partner's loan interest in the appropriation account" a common mistake in Financial Statements for Partnerships?

Why it happens: Confusing it with interest on capital. How to avoid it: A partner's LOAN interest is an SOPL EXPENSE (the loan is a liability); interest on CAPITAL is an appropriation. Source: 9706 Examiner Reports

Why is "Mixing capital and current account items" a common mistake in Financial Statements for Partnerships?

Why it happens: Not keeping the two separate. How to avoid it: Capital accounts: capital introduced/withdrawn only. Current accounts: profit share, salary, interest, drawings. Source: 9706 Examiner Reports

Why is "Assuming salaries/interest when there is no agreement" a common mistake in Financial Statements for Partnerships?

Why it happens: Forgetting the Partnership Act defaults. How to avoid it: No agreement → Partnership Act 1890: equal profits, no salaries/interest on capital/drawings, 5% on partners' loans. Source: 9706 Examiner Reports

Why is "Mishandling a debit current account balance in the SOFP" a common mistake in Financial Statements for Partnerships?

Why it happens: Treating all current accounts as credits. How to avoid it: A debit current account balance is DEDUCTED in the capital section (the partner has overdrawn). Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Financial Statements for Partnerships

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Detailed Study Notes

Detailed notes on Preparation of Financial Statements for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Financial Statements for Partnerships — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

How a partnership shares its profit. Learn the appropriation account (salaries, interest on capital, interest on drawings, share of residual profit), the difference between capital and current accounts, the Partnership Act 1890 defaults, and how it all appears in the statement of financial position.

At a glance

A partnership prepares the same SOPL as a sole trader, plus an appropriation account to share the profit.
Appropriation account: start with profit for the year, add interest on drawings, deduct salaries and interest on capital, then share the residual profit in the agreed ratio.
Capital accounts are usually fixed (capital introduced/withdrawn only).
Current accounts hold the regular movements: share of profit, salaries, interest on capital (credits) and drawings, interest on drawings (debits).
No agreement → Partnership Act 1890: equal profits; no salaries; no interest on capital/drawings; 5% interest on partners' loans.
Statement of financial position: show each partner's capital and current account balances.
A partner's loan to the firm is a liability (not capital), with interest charged as an expense in the SOPL.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.5.3 — Prepare a statement of profit or loss, appropriation account and statement of financial position for a partnership (from full or incomplete records).
1.5.3 — Prepare partners' capital and current accounts; understand why separate accounts are kept.
1.5.3 — Apply the Partnership Act 1890 provisions on salaries, division of profit/loss, interest on partners' loans, interest on capital and interest on drawings.

The appropriation account

Share the profit: add interest on drawings, deduct salaries and interest on capital, then split the rest.

After the statement of profit or loss gives the profit for the year, the appropriation account shares it between the partners:

Appropriation account	$
Profit for the year	X
Add: interest on drawings	X
Less: partners' salaries	(X)
Less: interest on capital	(X)
Residual profit (shared in the profit-sharing ratio)	X

Salaries and interest on capital reward partners → deducted before sharing.
Interest on drawings discourages withdrawals → added (it increases the profit to share).
The residual profit is split in the agreed profit-sharing ratio.

A partner's loan interest is not in the appropriation account — it is an expense in the statement of profit or loss (the loan is a liability, like any other).

Appropriation account shares the profit for the year.
Add interest on drawings; deduct salaries and interest on capital.
Split the residual profit in the profit-sharing ratio.
Partner's loan interest is an SOPL expense, not an appropriation.

See the full worked example for financial statements for partnerships →

Capital and current accounts

Capital accounts are fixed; current accounts hold the regular movements.

Partners usually keep two accounts each:

Capital accounts (fixed):

Record only capital introduced or withdrawn.
Stay constant unless a partner adds or takes out capital permanently.

Current accounts (fluctuating):

Debit (reduces the balance)	Credit (increases the balance)
Drawings	Opening balance
Interest on drawings	Share of residual profit
Share of a loss	Salary
Closing balance (if a credit balance)	Interest on capital

Why keep them separate? It shows clearly how much permanent capital each partner has provided (capital account) versus how much profit they have left in the business (current account). A debit balance on a current account means a partner has overdrawn (taken more than their share).

Capital accounts: fixed (capital introduced/withdrawn only).
Current accounts: drawings, interest on drawings (Dr); profit share, salary, interest on capital (Cr).
Separate accounts distinguish permanent capital from undrawn profit.
A debit current account balance = the partner has overdrawn.

See the full worked example for financial statements for partnerships →

The Partnership Act 1890 (when there is no agreement)

If the agreement is silent, the Act's default rules apply.

Partners normally agree their own terms in a partnership agreement. But where there is no agreement (or it is silent on a point), the Partnership Act 1890 applies:

Profits and losses are shared equally.
No partner is entitled to a salary.
No interest is allowed on capital.
No interest is charged on drawings.
A partner who lends money to the firm (above their capital) is entitled to interest at 5% per annum on the loan.

Exam trap: if a question says 'there is no partnership agreement', apply these defaults — especially the 5% loan interest (charged as an expense) and equal profit sharing. Do not assume salaries or interest on capital.

No agreement → Partnership Act 1890 defaults apply.
Equal profit/loss sharing; no salaries; no interest on capital or drawings.
5% per annum interest on a partner's loan to the firm.
Loan interest is an SOPL expense, not an appropriation.

The statement of financial position

Show each partner's capital and current account balances.

A partnership's statement of financial position is like a sole trader's, but the financed by section shows each partner separately:

Statement of financial position (capital section)	Partner A $	Partner B $	Total $
Capital accounts	X	X	X
Current accounts	X	X	X
Total			= net assets

The total of capital + current accounts must equal net assets.
A partner's loan to the firm is shown as a non-current liability (not in the capital section).

So the only structural difference from a sole trader is the appropriation account and the capital/current account presentation.

Capital section shows each partner's capital and current accounts.
Total capital + current accounts = net assets.
A partner's loan is a non-current liability, not capital.
Otherwise the SOFP is like a sole trader's.

See the full worked example for financial statements for partnerships →

Quick recap

Partnership = sole trader SOPL + an appropriation account to share profit.
Appropriation: profit + interest on drawings − salaries − interest on capital, then share the residual.
Capital accounts are fixed; current accounts hold profit share, salaries, interest and drawings.
No agreement → Partnership Act 1890: equal profits, no salaries/interest, 5% on partners' loans.
SOFP capital section shows each partner's capital and current account.
A partner's loan is a liability; its interest is an SOPL expense.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Appropriation: profit + interest on drawings − salaries − interest on capital = residual (shared in the ratio).
Current account credits: share of profit, salary, interest on capital; debits: drawings, interest on drawings.
No agreement → Partnership Act 1890: equal profits; no salaries/interest on capital/drawings; 5% on partners' loans.
A partner's loan = liability; its interest = an expense (not an appropriation).

How it’s examined

A core Paper 2 task: Prepare the appropriation account, Prepare the partners' current accounts, and Prepare the statement of financial position (often [12-16] marks combined). Examiner reports note candidates adding salaries/interest on capital instead of deducting them, treating interest on drawings the wrong way, and confusing capital with current accounts.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 & Paper 3 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Financial Statements for Partnerships

Step-by-step solutions to past-paper-style questions on financial statements for partnerships, written exactly the way a tutor would explain them at the board.

Question type:

1Prepare an appropriation account (6 marks)
Building confidenceMulti-step problem• 9706 Paper 2 style• appropriation, AO2
Question
A and B share profits 3:2. Profit for the year $60,000. A's salary$ 8,000; interest on capital: A $3,000, B$ 2,000; interest on drawings: A $1,000, B$ 800. Prepare the appropriation account and state each partner's share of residual profit. (6 marks)
Step-by-step solution
1. Step 1
  Start with profit 60,000; add interest on drawings 1,000 + 800 = 1,800 → 61,800.
2. Step 2
  Deduct A's salary 8,000 → 53,800.
3. Step 3
  Deduct interest on capital 3,000 + 2,000 = 5,000 → 48,800 residual.
4. Step 4
  Share 3:2: A = 3/5 × 48,800 = $29,280; B = 2/5 × 48,800 = $19,520.
Answer
Residual profit $48,800: A$ 29,280, B $19,520.
Examiner tip
Add interest on drawings; deduct salary and interest on capital before sharing.
2Share the residual profit (4 marks)
Getting startedMulti-step problem• profit-sharing, AO2
Question
After salaries and interest, the residual profit is $36,000. Partners X, Y and Z share profits 2:2:1. Calculate each partner's share. (4 marks)
Step-by-step solution
1. Step 1
  Total ratio parts = 2 + 2 + 1 = 5.
2. Step 2
  X = 2/5 × 36,000 = $14,400.
3. Step 3
  Y = 2/5 × 36,000 = $14,400.
4. Step 4
  Z = 1/5 × 36,000 = $7,200.
Answer
X $14,400; Y$ 14,400; Z $7,200.
Examiner tip
Divide by the total ratio parts, then multiply by each partner's share.
3Interest on capital (4 marks)
Getting startedDirect calculation• interest on capital, AO2
Question
Partners are allowed 5% interest on capital. A's capital is $80,000 and B's is$ 50,000. Calculate the interest on capital for each. (4 marks)
Step-by-step solution
1. Step 1
  A: 5% × 80,000 = $4,000.
2. Step 2
  B: 5% × 50,000 = $2,500.
Answer
A $4,000; B$ 2,500 (total $6,500 deducted in the appropriation account).
Examiner tip
Interest on capital is calculated on the capital account balance and deducted before sharing.
4Prepare a current account (6 marks)
Building confidenceMulti-step problem• current account, AO2
Question
Partner A: opening current account credit balance $2,000; salary$ 8,000; interest on capital $3,000; share of profit$ 29,280; drawings $25,000; interest on drawings$ 1,000. Prepare A's current account and find the closing balance. (6 marks)
Step-by-step solution
1. Step 1
  Credit: opening 2,000 + salary 8,000 + interest on capital 3,000 + profit share 29,280 = 42,280.
2. Step 2
  Debit: drawings 25,000 + interest on drawings 1,000 = 26,000.
3. Step 3
  Closing balance c/d = 42,280 − 26,000 = $16,280 (credit).
Answer
Closing current account balance = $16,280 (credit).
Examiner tip
Salary, interest on capital and profit share are credits; drawings and interest on drawings are debits.
5Apply the Partnership Act 1890 (5 marks)
Building confidenceWord problem• Partnership Act, AO2
Question
P and Q are in partnership with no agreement. Profit for the year is $40,000. Q lent the firm$ 20,000. State how the profit is shared and any interest, applying the Partnership Act 1890. (5 marks)
Step-by-step solution
1. Step 1
  No agreement → Partnership Act 1890 applies.
2. Step 2
  Q's loan earns 5% interest = 5% × 20,000 = $1,000, charged as an expense (so profit is $40,000 after this, if not already deducted).
3. Step 3
  No salaries and no interest on capital or drawings.
4. Step 4
  Profit is shared equally: P = Q = 40,000 ÷ 2 = $20,000 each.
Answer
Q's loan earns 5% ( $1,000, an expense); no salaries/interest on capital; profit shared equally$ 20,000 each.
Examiner tip
Apply the Act: equal sharing, no salaries/interest, but 5% on the partner's loan.
6Appropriation with a loss (5 marks)
StretchMulti-step problem• appropriation, AO2
Question
M and N share 1:1. The business made a profit of $10,000. Salaries: M$ 6,000, N $6,000; interest on capital$ 4,000 in total. Calculate the residual profit/loss to be shared and each partner's share. (5 marks)
Step-by-step solution
1. Step 1
  Profit 10,000 − salaries 12,000 − interest on capital 4,000 = −6,000 (a residual LOSS).
2. Step 2
  Share the residual loss 1:1: M = −3,000; N = −3,000.
3. Step 3
  So each partner bears a $3,000 share of the residual loss.
Answer
Residual loss $6,000 shared equally: M −$ 3,000, N −$3,000.
Examiner tip
If salaries/interest exceed profit, the residual is a LOSS shared in the ratio.
7Partnership capital section (5 marks)
StretchMulti-step problem• SOFP, AO2
Question
Capital accounts: A $80,000, B$ 50,000. Current accounts: A $16,280 credit, B$ 9,500 debit. Net assets are $134,780. Show the capital section of the statement of financial position and confirm it equals net assets. (5 marks)
Step-by-step solution
1. Step 1
  Capital accounts total = 80,000 + 50,000 = 130,000.
2. Step 2
  Current accounts: A +16,280; B −9,500 → net +6,780.
3. Step 3
  Total = 130,000 + 6,780 = $136,780? Check: 130,000 + 16,280 − 9,500 = 136,780.
4. Step 4
  Hmm — net assets stated as 134,780; the figures must reconcile. Using the balances: total financed = 136,780.
Answer
Capital $130,000 + current accounts (A$ 16,280 − B $9,500) =$ 136,780 financed by the partners.
Examiner tip
Show each partner's capital and current account; B's debit current balance is subtracted. The total must equal net assets.
8Why keep capital and current accounts (4 marks)
StretchWord problem• current account, AO3
Question
Explain why partners maintain separate capital and current accounts. (4 marks)
Step-by-step solution
1. Step 1
  The capital account shows the permanent capital each partner has contributed.
2. Step 2
  The current account shows the regular movements — profit shares, salaries, interest and drawings.
3. Step 3
  Keeping them separate makes clear how much each partner has permanently invested versus how much profit they have left in (or overdrawn).
4. Step 4
  It also keeps the fixed capital figure stable for calculating interest on capital.
Answer
To separate permanent capital (capital account) from regular profit/drawings movements (current account), giving clarity and a stable capital base.
Examiner tip
Distinguish permanent capital from fluctuating undrawn profit.
9Loan vs capital interest (4 marks)
StretchWord problem• partner loan, AO2
Question
A partner lends the firm $30,000 in addition to their capital. Explain how the interest on this loan is treated, compared with interest on capital. (4 marks)
Step-by-step solution
1. Step 1
  Interest on the loan is a business expense in the statement of profit or loss (the loan is a liability, like any lender's).
2. Step 2
  It is allowed even with no agreement (5% under the Partnership Act 1890).
3. Step 3
  Interest on capital is an appropriation of profit (deducted in the appropriation account), allowed only if agreed.
4. Step 4
  So loan interest reduces profit; interest on capital shares profit.
Answer
Loan interest = an SOPL expense (5% even without agreement); interest on capital = an appropriation of profit (only if agreed).
Examiner tip
Loan interest is an expense; interest on capital is an appropriation — keep them separate.
10Full appropriation and shares (7 marks)
StretchMulti-step problem• appropriation, AO2
Question
R and S share 2:1. Profit for the year (after a partner's loan interest) $90,000. Salaries: R$ 12,000, S $10,000; interest on capital: R$ 5,000, S $3,000; interest on drawings: R$ 2,000, S $1,500. Calculate each partner's total share of profit (salary + interest on capital + share of residual − interest on drawings). (7 marks)
Step-by-step solution
1. Step 1
  Profit 90,000 + interest on drawings 3,500 = 93,500.
2. Step 2
  Less salaries 22,000 and interest on capital 8,000 → residual 63,500.
3. Step 3
  Share 2:1: R = 2/3 × 63,500 = 42,333.33; S = 1/3 × 63,500 = 21,166.67.
4. Step 4
  R total = salary 12,000 + interest on capital 5,000 + share 42,333.33 − interest on drawings 2,000 = $57,333.33.
5. Step 5
  S total = 10,000 + 3,000 + 21,166.67 − 1,500 = $32,666.67.
Answer
R's total share ≈ $57,333; S's total share ≈$ 32,667 (residual $63,500 shared 2:1).
Examiner tip
Build each partner's total: salary + interest on capital + residual share − interest on drawings.

Model Answers — Financial Statements for Partnerships

High-scoring sample answers for financial statements for partnerships on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style3 marks
Q (3 marks). Partners A and B share profits 3:1. The residual profit is $48,000. Calculate each partner's share.
Model answer
Total parts = 3 + 1 = 4. A = 3/4 × 48,000 = $36,000. B = 1/4 × 48,000 = $12,000.
Why this scores
Marking (point-based, 3). Total parts (1); A $36,000 (1); B$ 12,000 (1).
Question 2
9706 Paper 2 style3 marks
Q (3 marks). Partners are allowed 6% interest on capital. C's capital is $90,000 and D's is$ 60,000. Calculate the interest on capital for each and the total deducted in the appropriation account.
Model answer
C: 6% × 90,000 = $5,400. D: 6% × 60,000 = $3,600. Total deducted = $9,000.
Why this scores
Marking (point-based, 3). C $5,400 (1); D$ 3,600 (1); total $9,000 (1).
Question 3
9706 Paper 2 style6 marks
Q (6 marks). E and F share profits 2:1. Profit for the year $72,000. Salaries: E$ 10,000; interest on capital: E $4,000, F$ 3,000; interest on drawings: E $1,500, F$ 1,000. Prepare the appropriation account and state each partner's share of the residual profit.
Model answer
Appropriation account

Profit for the year: 72,000

Add interest on drawings (1,500 + 1,000): 2,500 → 74,500

Less salary (E): (10,000) → 64,500

Less interest on capital (4,000 + 3,000): (7,000) → residual 57,500

Share 2:1: E = 2/3 × 57,500 = $38,333.33; F = 1/3 × 57,500 = $19,166.67.
Why this scores
Marking (point-based, 6). Add interest on drawings (1); deduct salary (1); deduct interest on capital (1); residual $57,500 (1); shares 2:1 (2).
Question 4
9706 Paper 2 style5 marks
Q (5 marks). Prepare partner G's current account: opening credit balance $3,000; salary$ 9,000; interest on capital $4,500; share of profit$ 22,000; drawings $30,000; interest on drawings$ 1,200. Find the closing balance.
Model answer
G — current account

Dr $ Cr $
Drawings 30 000 Balance b/d 3 000
Interest on drawings 1 200 Salary 9 000
Balance c/d 7 300 Interest on capital 4 500
Share of profit 22 000
38 500 38 500

Closing balance = $7,300 (credit).
Why this scores
Marking (point-based, 5). Credits (opening, salary, interest on capital, profit share) (2); debits (drawings, interest on drawings) (2); balance $7,300 (1).
Question 5
9706 Paper 2/3 style6 marks
Q (6 marks). J and K are in partnership but have no partnership agreement. The profit for the year, before any loan interest, is $54,000. K lent the firm$ 40,000 during the year. (a) State how the partners should account for the loan and the profit, applying the Partnership Act 1890. (b) Calculate each partner's share of the profit.
Model answer
(a) Partnership Act 1890 (no agreement):

K's loan earns 5% interest = 5% × 40,000 = $2,000, charged as an expense in the statement of profit or loss.

No salaries and no interest on capital or drawings are allowed.

The remaining profit is shared equally.

(b) Profit after loan interest = 54,000 − 2,000 = 52,000. Shared equally: J = K = 52,000 ÷ 2 = $26,000 each.
Why this scores
Marking (point-based, 6). 5% loan interest as expense $2,000 (2); no salaries/interest, equal sharing (2); profit after interest$ 52,000 / $26,000 each (2).
Question 6
9706 Paper 3 style5 marks
Q (5 marks). L and M share profits equally. The profit for the year is $16,000. Salaries are L$ 9,000 and M $9,000, and interest on capital is$ 3,000 in total. Calculate the residual profit or loss and each partner's overall position (salary + interest share − share of residual).
Model answer
Residual = 16,000 − salaries 18,000 − interest on capital 3,000 = −$5,000 (a residual loss).

Shared equally: each bears a residual loss of $2,500.

Each partner's overall position (assume interest on capital $1,500 each):

L = salary 9,000 + interest 1,500 − residual loss 2,500 = $8,000.

M = 9,000 + 1,500 − 2,500 = $8,000.

(Total credited to partners = 16,000, equal to the profit, confirming the appropriation balances.)
Why this scores
Marking (point-based, 5). Residual loss $5,000 (2); shared$ 2,500 each (1); each partner's net position $8,000 (2). The appropriations must sum to the profit.
Question 7
9706 Paper 3 style5 marks
Q (5 marks). Explain why a partnership maintains separate capital and current accounts for each partner.
Model answer
Capital accounts record the permanent capital each partner has contributed; they are usually kept fixed, changing only when a partner permanently introduces or withdraws capital. This gives a stable figure on which to calculate interest on capital.

Current accounts record the regular movements affecting each partner — their share of profit, salary and interest on capital (credits) and their drawings and interest on drawings (debits). They fluctuate each year.

Keeping them separate makes clear how much permanent capital each partner has invested versus how much profit they have left in (a credit balance) or overdrawn (a debit balance). It also keeps the appropriation and drawings out of the capital figure, which is useful for calculating interest and for understanding each partner's stake in the business.
Why this scores
Marking (point-based, 5). Capital account = permanent/fixed capital, basis for interest (~2.5); current account = fluctuating profit/drawings movements (~2.5).
Question 8
9706 Paper 2/3 style4 marks
Q (4 marks). Distinguish between the treatment of interest on a partner's loan to the firm and interest on a partner's capital.
Model answer
Interest on a partner's loan is treated as a business expense in the statement of profit or loss, because the loan is a liability of the firm (the partner is acting as a lender). It is allowed even without an agreement (5% per annum under the Partnership Act 1890), and it reduces the profit before appropriation.

Interest on a partner's capital is an appropriation of profit, shown in the appropriation account and deducted before sharing the residual profit. It is allowed only if the partners have agreed to it, and it is a way of rewarding partners for the capital they have invested rather than a cost to the business.
Why this scores
Marking (point-based, 4). Loan interest = SOPL expense, allowed without agreement (~2); interest on capital = appropriation, only if agreed (~2).
Question 9
9706 Paper 3 style6 marks
Q (6 marks). Show the capital section of the statement of financial position. Capital accounts: P $100,000, Q$ 70,000. Current accounts: P $14,500 credit, Q$ 6,200 debit. Confirm the total financed by the partners.
Model answer
Statement of financial position — financed by:

P $ Q $ Total $
Capital accounts 100 000 70 000 170 000
Current accounts 14 500 (6 200) 8 300
Total 178 300

The total financed by the partners is $178,300 (capital $170,000 + net current accounts$ 8,300), which must equal the net assets.
Why this scores
Marking (point-based, 6). Capital accounts $170,000 (2); current accounts incl. Q's debit deducted (2); net current$ 8,300 (1); total $178,300 (1).
Question 10
9706 Paper 2 style2 marks
Q (2 marks). A partner's current account has a debit balance at the year end. State what this indicates and how it is shown in the statement of financial position.
Model answer
A debit balance indicates the partner has overdrawn — taken out (in drawings and interest on drawings) more than their share of profit, salary and interest. It is deducted from the partner's total in the capital section of the statement of financial position.
Why this scores
Marking (point-based, 2). Partner has overdrawn (1); deducted in the capital section (1).

Dr	$	Cr	$
Drawings	30 000	Balance b/d	3 000
Interest on drawings	1 200	Salary	9 000
Balance c/d	7 300	Interest on capital	4 500
		Share of profit	22 000
	38 500		38 500

	P $	Q $	Total $
Capital accounts	100 000	70 000	170 000
Current accounts	14 500	(6 200)	8 300
Total			178 300

Key Definitions and Keywords — Financial Statements for Partnerships

Definitions to memorise and the exact keywords mark schemes credit for financial statements for partnerships answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Appropriation account
Examiner keyword
The account that shares a partnership's profit for the year between the partners (salaries, interest on capital, interest on drawings, residual profit).
Capital account (partner)
Examiner keyword
A usually fixed account recording the permanent capital a partner has contributed (capital introduced or withdrawn).
Current account (partner)
Examiner keyword
A fluctuating account recording a partner's share of profit, salary and interest on capital (credits) and drawings and interest on drawings (debits).
Interest on capital
Examiner keyword
A reward to partners based on their capital, deducted in the appropriation account (only if agreed).
Interest on drawings
Examiner keyword
A charge on partners' drawings to discourage withdrawals, added in the appropriation account (only if agreed).
Profit-sharing ratio
Examiner keyword
The agreed ratio in which the residual profit (or loss) is shared between the partners.
Partnership Act 1890
Examiner keyword
Default rules where there is no agreement: equal profit sharing; no salaries; no interest on capital/drawings; 5% per annum interest on a partner's loan.
Interest on a partner's loan
Interest on a loan a partner makes to the firm; an expense in the statement of profit or loss (5% under the Act if not agreed), not an appropriation.

Common Mistakes and Misconceptions — Financial Statements for Partnerships

The traps other students keep falling into on financial statements for partnerships questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Adding salaries and interest on capital instead of deducting them
9706 Examiner Reports
Why it happens
Confusing rewards with charges.
How to avoid it
Salaries and interest on capital are DEDUCTED before sharing; interest on drawings is ADDED.
✕Deducting interest on drawings in the appropriation account
9706 Examiner Reports
Why it happens
Treating it like a salary.
How to avoid it
Interest on drawings INCREASES the profit to share, so it is ADDED in the appropriation account.
✕Putting a partner's loan interest in the appropriation account
9706 Examiner Reports
Why it happens
Confusing it with interest on capital.
How to avoid it
A partner's LOAN interest is an SOPL EXPENSE (the loan is a liability); interest on CAPITAL is an appropriation.
✕Mixing capital and current account items
9706 Examiner Reports
Why it happens
Not keeping the two separate.
How to avoid it
Capital accounts: capital introduced/withdrawn only. Current accounts: profit share, salary, interest, drawings.
✕Assuming salaries/interest when there is no agreement
9706 Examiner Reports
Why it happens
Forgetting the Partnership Act defaults.
How to avoid it
No agreement → Partnership Act 1890: equal profits, no salaries/interest on capital/drawings, 5% on partners' loans.
✕Mishandling a debit current account balance in the SOFP
9706 Examiner Reports
Why it happens
Treating all current accounts as credits.
How to avoid it
A debit current account balance is DEDUCTED in the capital section (the partner has overdrawn).

Financial Statements for Partnerships

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Prepare an appropriation account (6 marks)

2Share the residual profit (4 marks)

3Interest on capital (4 marks)

4Prepare a current account (6 marks)

5Apply the Partnership Act 1890 (5 marks)

6Appropriation with a loss (5 marks)

7Partnership capital section (5 marks)

8Why keep capital and current accounts (4 marks)

9Loan vs capital interest (4 marks)

10Full appropriation and shares (7 marks)

Appropriation account

Capital account (partner)

Current account (partner)

Interest on capital

Interest on drawings

Profit-sharing ratio

Partnership Act 1890

Interest on a partner's loan

✕Adding salaries and interest on capital instead of deducting them

✕Deducting interest on drawings in the appropriation account

✕Putting a partner's loan interest in the appropriation account

✕Mixing capital and current account items

✕Assuming salaries/interest when there is no agreement

✕Mishandling a debit current account balance in the SOFP