AQA A-Level Accounting: Partnership accounts (7127) – Revision Notes

These notes condense section 3.15, Partnership accounts, of the AQA A-level Accounting (7127) specification (version 1.1, October 2026, for A-level exams from June 2019 onwards). The qualification is not tiered, and section 3.15 is assessed on Paper 1. For full explanations and longer worked examples, use the study guide; then test yourself with the practice questions.

See also the AQA A-level Accounting hub, the 7127 checklist, the notes on business organisation and sole trader statements, and the free diagnostics. All figures are invented.

3.15 at a glance

Specification content	Key skills
Prepare and comment on partnership financial statements	Income statement, appropriation account, statement of financial position; interest on capital and drawings, salaries, loan interest, profit/loss shares, revaluation, goodwill
Prepare capital and current accounts	Fixed or fluctuating capitals; Partnership Act 1890 where there is no agreement
Account for changes in partnership	Admission of a new partner; retirement of a partner

Dissolution of partnerships will not be examined (specification note).

Key terms

• Partnership agreement – the partners’ own terms for sharing profit, interest and salaries.
• Appropriation account – shows how profit for the year is divided between partners. (Older name: profit and loss appropriation account.)
• Interest on capital – a share of profit rewarding capital invested. Not an expense.
• Interest on drawings – a charge on partners for withdrawing resources during the year. Added back in the appropriation account.
• Partnership salary – a share of profit for work done. Not wages.
• Residual profit (or loss) – what remains after interest and salaries, shared in the profit-sharing ratio.
• Profit-sharing ratio – the agreed ratio for sharing residual profit or loss; equal under the Partnership Act 1890 if there is no agreement.
• Fixed capital account – holds agreed capital only; everything else goes to the current account.
• Fluctuating capital account – no current account; all appropriations and drawings pass through capital.
• Revaluation account – records changes in asset and liability values when the partnership changes.
• Goodwill – the excess of the value of the business as a whole over the net value of its separate assets.

Partnership Act 1890: default terms

Apply only where there is no agreement (or the agreement is silent):

Item	Default
Profit and loss sharing	Equally
Interest on capital	None
Interest on drawings	None
Partnership salaries	None
Interest on a partner’s loan	Allowed

Where each item goes

Item	Statement	Effect
Interest on a partner’s loan	Income statement (expense)	Reduces profit for the year
Partner’s loan	Statement of financial position (liability)	Not capital
Interest on drawings	Appropriation account	Added; debited to current account
Interest on capital	Appropriation account	Deducted; credited to current account
Partnership salary	Appropriation account	Deducted; credited to current account
Residual profit share	Appropriation account	Credited (a loss is debited)
Drawings	Current account (debit)	Not in the appropriation account

Method in steps: appropriation account

Profit for the year (after loan interest)
+ Interest on drawings (each partner)
- Interest on capital (each partner)
- Partnership salaries
= Residual profit (or loss)
  shared in the profit-sharing ratio

Check: interest on capital + salaries + residual = profit for the year + interest on drawings.

Method in steps: current account (fixed capitals)

Credit side:  opening credit balance, interest on capital,
              salary, share of residual profit
Debit side:   opening debit balance, interest on drawings,
              drawings, share of residual loss
Balance:      carried down; a debit balance means drawings
              exceeded what the partner was credited

Present partners side by side in columnar form: it is quicker and each column must balance.

Changes in partnership: the entries

Event	Debit	Credit
Asset revalued upward	Asset	Revaluation
Asset revalued downward / provision increased	Revaluation	Asset / provision
Revaluation profit	Revaluation	Old partners’ capitals (old ratio)
Revaluation loss	Old partners’ capitals (old ratio)	Revaluation
Goodwill created	Goodwill	Old partners’ capitals (old ratio)
Goodwill written off (not kept)	Continuing partners’ capitals (new ratio)	Goodwill
New partner brings cash	Bank	New partner’s capital
Retiring partner’s current account (credit balance)	Current account	Capital account
Retiring partner paid	Capital account	Bank and/or loan account

Rule of thumb: anything that arose under the old partnership (revaluation, goodwill created) is shared in the old ratio. Writing goodwill off is in the new ratio.

Small worked reminders

Goodwill net effect. A and B share equally. C joins; the new ratio is A 2 : B 2 : C 1. Goodwill of £18,000 is not kept.

• Created 1 : 1: A £9,000, B £9,000.
• Written off 2 : 2 : 1: A £7,200, B £7,200, C £3,600.
• Net: A +£1,800, B +£1,800, C -£3,600.

The new partner pays for the share of goodwill gained, and the old partners who gave up profit share are credited.

Residual loss. If interest and salaries exceed the profit available, they are still credited in full and the shortfall is shared as a loss in the profit-sharing ratio.

Retiring partner. Amount due = capital + current account credit balance (or minus a debit balance) + revaluation share + goodwill share. Anything not paid in cash becomes a loan, shown as a liability.

Commenting on partnership statements

• Compare each partner’s total share (salary + interest + residual) with the capital and work they contribute.
• A falling or debit current account means drawings exceed the partner’s share, draining cash from the firm.
• A large loan from a partner adds interest before profit for the year and must be repaid.
• On admission, judge whether the new partner’s capital and goodwill payment are fair to the existing partners.
• Under the Partnership Act 1890, equal sharing may be unfair where capital or effort differs.

Must-know distinctions

Easily confused	The difference
Interest on capital vs interest on a partner’s loan	Capital: appropriation of profit. Loan: expense before profit.
Partnership salary vs wages	Salary to a partner is an appropriation; wages to employees are an expense.
Fixed vs fluctuating capitals	Fixed: capital stays, current account moves. Fluctuating: one account moves.
Old ratio vs new ratio	Old for revaluation and creating goodwill; new for writing goodwill off.
Goodwill kept vs not kept	Kept: shown as a non-current asset. Not kept: created then written off, closing to nil.
Admission vs retirement	Admission: new partner brings capital. Retirement: retiring partner is paid in cash or left as a loan.

Quick self-test

1. Where is interest on a partner’s loan shown?
2. Profit for the year is £40,000. Interest on drawings is £600, interest on capital £5,000 and salaries £12,000. Calculate the residual profit.
3. Share the residual profit from question 2 in the ratio 3 : 1.
4. Under fixed capitals, which account receives a partner’s share of profit?
5. A partner draws £9,000 on 1 May. The year ends 31 December and interest on drawings is 6% a year. Calculate the interest.
6. On admission, a building rises £20,000, inventory falls £1,500 and the provision for doubtful debts rises £500. Old partners share 2 : 1. Calculate each partner’s share of the revaluation.
7. Using the goodwill reminder above, what single amount does the new partner’s capital account lose?
8. Two partners have capitals of £30,000 and £10,000 and no agreement. Profit is £25,000. How much is each partner credited?
9. A retiring partner has capital £20,000, a current account debit balance of £1,500, a revaluation share of £2,000 and a goodwill share of £5,000. Calculate the amount due.
10. Is a partnership salary an expense in the income statement?
11. State what a debit balance on a current account shows.

Answers

1. Income statement, as an expense.
2. 40,000 + 600 - 5,000 - 12,000 = £23,600.
3. £17,700 and £5,900.
4. The current account (credit side).
5. 9,000 x 6% x 8/12 = £360.
6. Profit 20,000 - 1,500 - 500 = £18,000; £12,000 and £6,000.
7. £3,600.
8. £12,500 each (shared equally).
9. 20,000 - 1,500 + 2,000 + 5,000 = £25,500.
10. No. It is an appropriation of profit.
11. The partner has drawn more than the opening balance plus everything credited for the year.

Where marks are usually lost

• Putting loan interest below profit for the year, in the appropriation account.
• Subtracting interest on drawings in the appropriation account.
• Forgetting the time factor in interest on drawings (months from the drawing date to the year end).
• Applying the agreement’s salary or interest when the question says there is no agreement.
• Sharing revaluation profit or goodwill created in the new ratio.
• Omitting the goodwill write-off, so the goodwill account does not close.
• Missing the retiring partner’s current account transfer, or adding a debit balance instead of deducting it.
• Showing a debit current account balance without brackets in the equity section.
• Placing a retiring partner’s loan in capital rather than liabilities.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards, published by AQA – section 3.15, Partnership accounts.