Why is "Including partner salary as an expense in the Income Statement." a common mistake in Financial statements of a partnership?

Why it happens: Word 'salary' suggests expense. How to avoid it: Partner salary is an APPROPRIATION of profit — appears in the Appropriation Account, NOT as an expense in the IS. Source: Edexcel 4AC1 examiner reports.

Why is "Treating interest on capital as a finance expense." a common mistake in Financial statements of a partnership?

Why it happens: Other interest items (loan interest) ARE expenses. How to avoid it: Loan interest paid to a BANK = expense. Interest on partner's capital = profit appropriation (paid to owner, not third party).

Why is "Calculating interest on drawings on the full annual basis without time apportionment." a common mistake in Financial statements of a partnership?

Why it happens: Simplification. How to avoid it: Each drawing is for the months REMAINING in the year. Sum the apportioned interests.

Why is "Putting drawings or profit share into the Capital Account." a common mistake in Financial statements of a partnership?

Why it happens: Confusion about fixed vs fluctuating accounts. How to avoid it: Capital = FIXED (only initial/additional permanent capital). Current = everything else.

Why is "Appropriation Account doesn't balance to zero." a common mistake in Financial statements of a partnership?

Why it happens: Arithmetical error or missing component. How to avoid it: The full profit must be allocated. If your total appropriations < profit, you haven't shared the residual correctly.

Why is "Putting drawings on the Cr side of the Current Account." a common mistake in Financial statements of a partnership?

Why it happens: Confusion. How to avoid it: Drawings REDUCE the partner's entitlement → Dr side of Current Account. Profit share INCREASES it → Cr side.

Why is "Forgetting to apply Partnership Act 1890 defaults when no agreement exists." a common mistake in Financial statements of a partnership?

Why it happens: Students assume there's always an agreement. How to avoid it: If question says 'no agreement': profit shared equally, no interest on capital, no salaries, 5% interest on partner loans.

The preparation of financial statementsPearson Edexcel IGCSE Accounting 4AC1

Financial statements of a partnership

Q: Why is "Putting drawings on the Cr side of the Current Account." a common mistake in Financial statements of a partnership?

Why it happens: Confusion. How to avoid it: Drawings REDUCE the partner's entitlement → Dr side of Current Account. Profit share INCREASES it → Cr side.

Q: Why is "Forgetting to apply Partnership Act 1890 defaults when no agreement exists." a common mistake in Financial statements of a partnership?

Why it happens: Students assume there's always an agreement. How to avoid it: If question says 'no agreement': profit shared equally, no interest on capital, no salaries, 5% interest on partner loans.

Work through the notes, try the practice questions, then take the quiz. The report tells you exactly what to revise next.

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Partnership Financial Statements — Edexcel IGCSE Accounting (4AC1) Detailed Notes

Income Statement, Profit and Loss Appropriation Account, partners' Capital Accounts (fixed), Current Accounts (fluctuating) and SOFP. Master the appropriation logic and the two-account method.

What you’ll learn

Mapped to the Pearson Edexcel IGCSE 4AC1 syllabus (2026 onwards).

Prepare a partnership Income Statement.
Prepare a Profit and Loss Appropriation Account allocating profit between partners.
Calculate interest on capital, interest on drawings, partner salaries and profit share.
Prepare partners' Capital and Current Accounts.
Present the partnership SOFP with separate Capital and Current Accounts for each partner.
Apply Partnership Act 1890 defaults when no agreement exists.

Partnership Income Statement — same as sole trader

Top half identical; differences begin at the Appropriation Account.

The partnership Income Statement is structurally IDENTICAL to a sole trader's:

Sales → Net Sales → less Cost of Sales = Gross Profit.
- Other Income.
− Expenses (rent, wages of EMPLOYEES, depreciation, etc.).
= Profit for the year.

Crucial difference: Wages paid to partners are NOT expenses — they are appropriations of profit. Only wages paid to employees appear as expenses.

Similarly, interest on bank loans (to third parties) IS an expense. Interest on partners' capital is an appropriation.

The Profit and Loss Appropriation Account

Allocates the year's profit between partners per the agreement.

Format:

	£	£
Profit for the year (from IS)		X
Add: Interest on Drawings (each partner)		+
		X
Less: Partner Salaries	(a)
Less: Interest on Capital (each partner)	(b)
	(a+b)
Residual profit to share		X
Share of profit: each partner in agreed ratio	(X)
		0

Add interest on drawings, deduct salaries and interest on capital, then share the residual — the appropriation account closes to zero.

Why the £0 balance: every penny of profit has been allocated to partners.

Order of appropriations:

Interest on drawings ADDED to profit (charged to partners).
Partner salaries DEDUCTED (credited to partners).
Interest on capital DEDUCTED (credited to partners).
Residual SHARED in agreed ratio.

Partner's Capital Account — fixed and simple

Records only permanent capital contributions.

Capital Accounts hold the fixed permanent capital each partner has contributed. They only change when:

A partner introduces additional capital (Dr Bank, Cr Capital Account).
A partner formally withdraws capital (Dr Capital, Cr Bank).
A new partner joins or an existing partner leaves.

Day-to-day partnership transactions (drawings, profit share, interest) do NOT touch the Capital Account. They go to the Current Account.

Format: Standard T-account with Cr balance (the partner has 'invested' that capital).

Partner's Current Account — fluctuating

Annual reckoning of each partner's earnings minus drawings.

Current Accounts hold everything OTHER than fixed capital. Each year:

Cr side (additions to partner's entitlement):

Opening balance (b/d, if Cr).
Salary credited from appropriation.
Interest on Capital credited from appropriation.
Share of profit credited from appropriation.

Dr side (deductions):

Opening balance (b/d, if Dr — overdrawn).
Drawings during the year.
Interest on Drawings charged to partner.

Closing balance: can be Dr (partner has overdrawn — owes the partnership) or Cr (business owes partner).

On the SOFP, the Current Account balance is added to (or deducted from) the Capital Account for each partner.

Interest on capital and on drawings — exam mechanics

Interest on capital = simple %. Interest on drawings = TIME-APPORTIONED.

Interest on Capital:

Formula: Capital Balance × Agreed Rate %.
Calculated on the closing capital (or as stated in the question).
Typically rates are 5–10%.

Interest on Drawings:

Time-apportioned for each drawing.
Formula: Drawing × Rate % × (Months remaining ÷ 12).
Sum all apportioned interests for each partner.

Example:

Partner C drew £2,000 on 1 April, £1,500 on 1 July, £3,000 on 1 October.
Rate 8% p.a., year-end 31 December.
£2,000 × 8% × 9/12 = £120 (Apr–Dec, 9 months).
£1,500 × 8% × 6/12 = £60 (Jul–Dec, 6 months).
£3,000 × 8% × 3/12 = £60 (Oct–Dec, 3 months).
Total = £240.

Partnership SOFP — Capital and Current side by side

Show each partner's Capital and Current balances separately.

Capital section of partnership SOFP:

	A £	B £	Total £
Capital Account	X	X	X
Current Account	X	X	X
Total Partner's Equity	X	X	X

The rest of the SOFP (assets, liabilities) is structurally identical to a sole trader's.

Total Partner's Equity replaces 'Capital' in the SOFP equation: Assets = Total Partner's Equity + Non-current and Current Liabilities.

Partnership Act 1890 defaults

Apply if the question says 'no agreement exists'.

If no partnership agreement exists, the Partnership Act 1890 dictates:

Profits and losses shared EQUALLY — regardless of capital contributions.
NO interest on capital.
NO interest on drawings.
NO partner salaries.
5% interest on partner loans to the partnership.

Memorise this list — questions occasionally test it.

How it’s examined

Paper 2: Full set of partnership statements — Appropriation Account, Current Accounts (both partners), SOFP capital section. Typically a 20–25 mark question.

Paper 1: Identify appropriation vs expense items (4 marks); calculate interest on capital/drawings; explain partner accounts.

Sources: Pearson Edexcel International GCSE in Accounting (4AC1) Specification — Issue 3; Edexcel 4AC1 Examiner Reports (2022–2024). Last reviewed 2026-05-19.

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Step-by-step worked examples — Financial statements of a partnership

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

1Identify partnership-specific features
Getting started• Edexcel 4AC1 style — short-answer (5 marks)• partnership-features, AO1
Question
Identify whether each is a feature of a partnership, a sole trader, BOTH, or NEITHER: (a) Profit and Loss Appropriation Account. (b) Capital Account. (c) Current Account. (d) Interest on capital paid to owner. (e) Drawings.
Step-by-step solution
1. Step 1
  Partnership-only features: Appropriation Account, multiple Capital and Current Accounts, interest on capital/drawings between partners.
Answer
(a) Partnership only — allocates profit between partners.

(b) Both — each partner has one.

(c) Partnership only — fluctuating account holding profit share, drawings, interest.

(d) Partnership only — sole trader can't pay interest to themselves.

(e) Both — taken by sole trader or partners.
Examiner tip
Current Accounts are partnership-only. They hold profit share + interest on capital + salaries minus interest on drawings minus partner drawings.
2State whether each item belongs in the Income Statement or Appropriation Account
Building confidence• Edexcel 4AC1 style — short-answer (5 marks)• appropriation, AO1, AO2
Question
For each item, state whether it appears in the Income Statement (above the profit-for-the-year line) or in the Appropriation Account (below): (a) Office wages paid to employees. (b) Salary paid to Partner A as per agreement. (c) Interest on bank loan. (d) Interest on Partner B's capital. (e) Interest charged on Partner A's drawings.
Step-by-step solution
1. Step 1
  Income Statement items are expenses to third parties. Appropriation items relate to the partners as owners.
Answer
(a) Income Statement (third-party wages = expense).

(b) Appropriation Account (partner salary = profit allocation, not expense).

(c) Income Statement (loan interest is a business expense).

(d) Appropriation Account (interest on capital = profit allocation).

(e) Appropriation Account (added to profit for sharing).
Examiner tip
Partner salaries and interest on capital are NOT expenses — they are appropriations of profit. This is one of the most-marked errors.
3Identify the correct partner account for each entry
Higher• Edexcel 4AC1 style — short-answer (5 marks)• partner-accounts, AO1, AO2
Question
State which partner account (Capital or Current) each entry goes to: (a) Partner pays £20,000 into the business as initial capital. (b) Partner's share of profit £12,000. (c) Interest on capital £500 due to a partner. (d) Partner takes £4,000 drawings during the year. (e) Interest charged on partner's drawings £80.
Step-by-step solution
1. Step 1
  Capital Account = fixed contributions only. Current Account = everything else.
Answer
(a) Capital Account (initial contribution).

(b) Current Account (profit share).

(c) Current Account (interest on capital paid to partner).

(d) Current Account (drawings — reduces the partner's earnings balance).

(e) Current Account (charge to partner — added to the Dr side of their current account).
Examiner tip
Capital accounts are FIXED — only changed when a partner introduces or withdraws permanent capital. All other transactions go through Current Accounts.
4Calculate the appropriation of profit
Building confidence• Edexcel 4AC1 style — calculation (6 marks)• appropriation-calc, AO1, AO2
Question
Profit for the year £60,000. Partnership agreement: Salary £8,000 to A only. Interest on capital at 6% on capital balances (A £40,000; B £30,000). Profit shared in ratio 3:2 (A:B). Calculate each partner's total share of profit.
Step-by-step solution
1. Step 1
  Appropriations first, then residual profit-share.
Answer
Appropriations:

Salary A: £8,000.

Interest on capital: A £40,000 × 6% = £2,400; B £30,000 × 6% = £1,800. Total £4,200.

Total appropriated = £8,000 + £4,200 = £12,200.

Residual profit: £60,000 − £12,200 = £47,800.

A: 3/5 × £47,800 = £28,680.

B: 2/5 × £47,800 = £19,120.

Total share:

A: £8,000 + £2,400 + £28,680 = £39,080.

B: £1,800 + £19,120 = £20,920.

Check: £39,080 + £20,920 = £60,000 ✓.
Examiner tip
Always include the final check. Mark schemes give the verification mark.
5Calculate interest on partners' drawings
Higher• Edexcel 4AC1 style — calculation (4 marks)• drawings-interest, AO1, AO2
Question
Partner C made the following drawings during the year ended 31 December: £2,000 on 1 April; £1,500 on 1 July; £3,000 on 1 October. Interest on drawings is charged at 8% per annum, time-apportioned. Calculate the total interest on drawings.
Step-by-step solution
1. Step 1
  Apportion each drawing for the months until year-end.
Answer
Time-apportioned interest:

£2,000 × 8% × 9/12 = £120 (Apr–Dec).

£1,500 × 8% × 6/12 = £60 (Jul–Dec).

£3,000 × 8% × 3/12 = £60 (Oct–Dec).

Total interest on drawings = £240

Dr Partner C's Current Account £240; Cr Appropriation Account £240 (income added to distributable profit).
Examiner tip
Time apportionment is the trick. Each drawing earns interest only for the months it was 'out' of the business. Annual basis would give 8% × £6,500 = £520 — wrong.
6Calculate a partner's closing Current Account balance
Higher• Edexcel 4AC1 style — calculation (6 marks)• current-account, AO1, AO2
Question
Partner A's Current Account opening balance was £1,500 Cr. During the year:

Salary £8,000.

Interest on capital £2,400.

Share of profit £28,680.

Drawings £25,000.

Interest on drawings £400.

Calculate the closing balance.
Step-by-step solution
1. Step 1
  Salary, interest on capital, profit share are Cr (additions). Drawings and interest on drawings are Dr (reductions).
Answer
Closing balance = £1,500 + £8,000 + £2,400 + £28,680 − £25,000 − £400 = £15,180 Cr

Partner A is OWED £15,180 by the business (a liability for the partnership).
Examiner tip
Current Accounts can be Dr or Cr. A Dr balance means the partner has overdrawn — typically because their drawings exceeded their profit share + interest + salary.

7Prepare the Profit and Loss Appropriation Account

Higher• Edexcel 4AC1 style — extended (10 marks)• appropriation-format, AO1, AO2

Question

From the data in Example 4 (Profit £60,000; salary A £8,000; interest on capital A £2,400, B £1,800; profit-share 3:2), prepare the P&L Appropriation Account.

Step-by-step solution

Step 1
Format: Profit at top, deduct appropriations, allocate residual.

Answer

Profit and Loss Appropriation Account for the year ended 31 December 2026

	£	£
Profit for the year		60,000
Add: Interest on drawings (if any)		0
		60,000
Less: Salary — Partner A	(8,000)
Less: Interest on Capital — A	(2,400)
Less: Interest on Capital — B	(1,800)
	(12,200)
Residual profit available for sharing		47,800
Share of profit: A (3/5)	(28,680)
Share of profit: B (2/5)	(19,120)
	(47,800)
Balance		£0

Examiner tip

The Appropriation Account ALWAYS balances to zero — every penny of profit has been allocated. Top-band candidates clearly label each line and end with zero.

8Prepare both partners' Current Accounts
Stretch• Edexcel 4AC1 style — extended (10 marks)• current-accounts, AO1, AO2
Question
Using data from Examples 4–6 (and assuming B's drawings £18,000, B's interest on drawings £300, B's opening current balance £900 Cr), prepare both partners' Current Accounts.
Step-by-step solution
1. Step 1
  Current Accounts in T-format: Dr side for drawings + interest on drawings; Cr side for opening + salary + interest on capital + profit share.
Answer
Partner A Current Account

Dr Cr
Drawings 25,000 Balance b/d 1,500
Interest on drawings 400 Salary 8,000
Balance c/d 15,180 Interest on Capital 2,400
Share of profit 28,680
40,580 40,580
Balance b/d 15,180

Partner B Current Account

Dr Cr
Drawings 18,000 Balance b/d 900
Interest on drawings 300 Interest on Capital 1,800
Balance c/d 3,520 Share of profit 19,120
21,820 21,820
Balance b/d 3,520
Examiner tip
T-account format earns presentation marks. A* candidates double-rule the totals.
9Prepare the Capital section of the partnership SOFP
Higher• Edexcel 4AC1 style — extended (8 marks)• partnership-sofp, AO1, AO2
Question
Capital balances: A £40,000; B £30,000. Closing current balances: A £15,180; B £3,520 Cr. Prepare the Capital section of the SOFP at 31 Dec 2026.
Step-by-step solution
1. Step 1
  Show fixed capitals separately + current balances.
Answer
Capital and Reserves — SOFP at 31 December 2026

A £ B £ Total £
Capital Account (fixed) 40,000 30,000 70,000
Current Account 15,180 3,520 18,700
Total 55,180 33,520 88,700
Examiner tip
Use a three-column layout (Partner A, Partner B, Total) — clean presentation earns marks. Capital and Current shown SEPARATELY.

	A £	B £	Total £
Capital Account (fixed)	40,000	30,000	70,000
Current Account	15,180	3,520	18,700
Total	55,180	33,520	88,700

Key Formulae — Financial statements of a partnership

The formulae you need to memorise for financial statements of a partnership on the Pearson Edexcel IGCSE 4AC1 paper, with every variable defined in plain English and a note on when to use it.

Interest on capital
$Interest on Capital = Capital Balance × Agreed Rate %$
$Capital Balance$
Fixed capital balance of the partner
$Agreed Rate %$
Rate stated in the partnership agreement
When to use
Appropriation Account — reward to partners for the capital they have invested in the business.
Example
£40,000 × 6% = £2,400.
Interest on drawings (time-apportioned)
$Interest on Drawings = Σ (Drawing × Rate % × Months remaining ÷ 12)$
$Drawing$
Amount withdrawn at a specific date
$Rate %$
Agreed annual rate
$Months remaining$
Months from date of drawing to year-end
When to use
Charge to partners for taking funds out before year-end.
Example
£2,000 × 8% × 9/12 = £120 (drawn April, year-end December).
Residual profit to share
$Residual = Profit + Interest on Drawings − Salaries − Interest on Capital$
When to use
After appropriations, the remaining profit is divided in the agreed ratio.
Example
60,000 + 0 − 8,000 − 4,200 = £47,800 residual.
Each partner's profit share
$Share = Residual Profit × Partner's Ratio Fraction$
When to use
Final step of appropriation.
Example
Ratio 3:2 of £47,800 → A gets 3/5 (£28,680); B gets 2/5 (£19,120).
Closing Current Account balance
$Closing CA = Opening + Salary + Interest on Capital + Profit Share − Drawings − Interest on Drawings$
When to use
End of period — to derive each partner's net entitlement.
Example
1,500 + 8,000 + 2,400 + 28,680 − 25,000 − 400 = £15,180 Cr.
Total partner's equity
$Partner's Equity = Capital Account + Current Account$
When to use
SOFP — bottom-section total per partner.
Example
A: £40,000 + £15,180 = £55,180.

Key Definitions and Keywords — Financial statements of a partnership

Definitions to memorise and the exact keywords mark schemes credit for financial statements of a partnership answers — sharpened from recent examiner reports for the 2026 Pearson Edexcel IGCSE 4AC1 sitting.

Profit and Loss Appropriation Account
Examiner keyword
An account that allocates the profit (or loss) for the year between partners according to the partnership agreement. Sits BELOW the income statement.
Capital Account (partnership)
Examiner keyword
A FIXED account showing each partner's permanent capital contribution to the business. Only changes when capital is introduced or formally withdrawn.
Current Account (partnership)
Examiner keyword
A fluctuating account for each partner. Cr side: profit share, interest on capital, salary. Dr side: drawings, interest on drawings.
Interest on capital
Examiner keyword
A reward to partners proportional to their fixed capital. An APPROPRIATION of profit (not an expense).
Interest on drawings
Examiner keyword
A charge against partners for taking funds out early. Time-apportioned based on when each drawing occurred. INCOME to the partnership for appropriation purposes.
Partner's salary
Examiner keyword
A fixed sum payable to a partner per the partnership agreement. An APPROPRIATION of profit, NOT an expense.
Profit-sharing ratio
Examiner keyword
The agreed ratio in which residual profit (after appropriations) is shared between partners (e.g., 3:2).
Partnership Act 1890 defaults
When no partnership agreement exists: profits shared equally; no interest on capital or drawings; no partner salaries; 5% interest on loans from partners.

Common Mistakes and Misconceptions — Financial statements of a partnership

The traps other students keep falling into on financial statements of a partnership questions — taken from recent Pearson Edexcel IGCSE 4AC1 examiner reports and mark schemes — and how to avoid them.

✕Including partner salary as an expense in the Income Statement.
Edexcel 4AC1 examiner reports.
Why it happens
Word 'salary' suggests expense.
How to avoid it
Partner salary is an APPROPRIATION of profit — appears in the Appropriation Account, NOT as an expense in the IS.
✕Treating interest on capital as a finance expense.
Why it happens
Other interest items (loan interest) ARE expenses.
How to avoid it
Loan interest paid to a BANK = expense. Interest on partner's capital = profit appropriation (paid to owner, not third party).
✕Calculating interest on drawings on the full annual basis without time apportionment.
Why it happens
Simplification.
How to avoid it
Each drawing is for the months REMAINING in the year. Sum the apportioned interests.
✕Putting drawings or profit share into the Capital Account.
Why it happens
Confusion about fixed vs fluctuating accounts.
How to avoid it
Capital = FIXED (only initial/additional permanent capital). Current = everything else.
✕Appropriation Account doesn't balance to zero.
Why it happens
Arithmetical error or missing component.
How to avoid it
The full profit must be allocated. If your total appropriations < profit, you haven't shared the residual correctly.
✕Putting drawings on the Cr side of the Current Account.
Why it happens
Confusion.
How to avoid it
Drawings REDUCE the partner's entitlement → Dr side of Current Account. Profit share INCREASES it → Cr side.
✕Forgetting to apply Partnership Act 1890 defaults when no agreement exists.
Why it happens
Students assume there's always an agreement.
How to avoid it
If question says 'no agreement': profit shared equally, no interest on capital, no salaries, 5% interest on partner loans.

Practice questions

Exam-style questions with step-by-step worked solutions. Try one before checking the method.

Past paper style quiz

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Dr		Cr
Drawings 25,000		Balance b/d 1,500
Interest on drawings 400		Salary 8,000
Balance c/d 15,180		Interest on Capital 2,400
		Share of profit 28,680
40,580		40,580
		Balance b/d 15,180

Dr		Cr
Drawings 18,000		Balance b/d 900
Interest on drawings 300		Interest on Capital 1,800
Balance c/d 3,520		Share of profit 19,120
21,820		21,820
		Balance b/d 3,520

Financial statements of a partnership

Short Study Notes in the form of Slides

Short Study Notes — Financial statements of a partnership

Detailed Notes

What you’ll learn

How it’s examined

1Identify partnership-specific features

2State whether each item belongs in the Income Statement or Appropriation Account

3Identify the correct partner account for each entry

4Calculate the appropriation of profit

5Calculate interest on partners' drawings

6Calculate a partner's closing Current Account balance

7Prepare the Profit and Loss Appropriation Account

8Prepare both partners' Current Accounts

9Prepare the Capital section of the partnership SOFP

Interest on capital

Interest on drawings (time-apportioned)

Residual profit to share

Each partner's profit share

Closing Current Account balance

Total partner's equity

Profit and Loss Appropriation Account

Capital Account (partnership)

Current Account (partnership)

Interest on capital

Interest on drawings

Partner's salary

Profit-sharing ratio

Partnership Act 1890 defaults

✕Including partner salary as an expense in the Income Statement.

✕Treating interest on capital as a finance expense.

✕Calculating interest on drawings on the full annual basis without time apportionment.

✕Putting drawings or profit share into the Capital Account.

✕Appropriation Account doesn't balance to zero.

✕Putting drawings on the Cr side of the Current Account.

✕Forgetting to apply Partnership Act 1890 defaults when no agreement exists.

Practice questions

Past paper style quiz

Assess your understanding