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Saturday, February 6, 2010

Introduction to Partnership Accounts

Partnership is defined as the relationship which exists between persons carrying on a business in common with a view of profit.

In other words, a partnership is an arrangement between two or more individuals in which they undertake to share the risks and rewards of a joint business operations.

It is usual for a partnership to be established formally by means of a partnership agreement. However, if individuals act as though they are in partnership even if no written agreement exists, they it will be presumed in law that a partnership does exist and that its terms of agreement are the same as those laid down in the partnership act 1890.

The partnership agreement

The partnership agreement is a written agreement in which the terms of the partnership are set out, and in particular the financial arrangements as between partners the items it should cover include the following.
  • Capital
  • Profit sharing ration
  • Interest on capital
  • Partners salaries
  • Drawings
  • Guaranteed minimum profit shares

In the absence of a formal agreement between the partners, certain rules laid down by the partnership act are presumed to apply instead.

  • Residual profits are shared equally between the partners
  • There are no partners’ salaries
  • Partners receive no interest on the capital they invest in the business
  • Partners are entitled to interest of 5% per annul on any loans they advance to the business in excess of their agreed capital


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