AQA A-Level Accounting: Partnership accounts (7127)

This guide covers 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. The specification places section 3.15 in the content assessed by Paper 1, a 3-hour written exam, and you must use a calculator in the exam.

Use it with the revision notes and the practice questions. It builds on sole trader financial statements and on types of business organisation, which explains what a partnership is. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All businesses and figures are invented.

What section 3.15 covers

Specification content (3.15)	What you must be able to do
Prepare and comment on the financial statements of partnerships	Prepare the income statement, appropriation account and statement of financial position, calculating interest on capital, interest on drawings, partnership salaries, interest on a partner’s loan, shares of profit and losses, and the revaluation of assets and treatment of goodwill
Prepare capital and current accounts of partners	Keep each partner’s capital and current account, applying the Partnership Act 1890 where there is no agreement
Account for changes in partnership	Record the admission of a new partner and the retirement of a partner

The specification states that the dissolution of partnerships will not be examined.

The partnership agreement and the Partnership Act 1890

Partners normally agree how profit is shared. A typical agreement covers interest on capital, interest charged on drawings, salaries, the profit-sharing ratio and interest on any loan a partner makes to the firm. If there is no agreement, the Partnership Act 1890 applies. Its default terms are:

• profits and losses are shared equally, whatever each partner’s capital
• no interest on capital
• no interest charged on drawings
• no partnership salaries
• interest is allowed on a partner’s loan to the firm.

Worked example: no agreement. Ryder (capital £50,000) and Sloane (capital £10,000) have no written agreement. Profit for the year is £48,000. Sloane works full time and claims a salary of £15,000. Ryder claims 8% interest on capital.

Neither claim succeeds without an agreement. Each partner is credited with 48,000 / 2 = £24,000.

Comment: Ryder has five times Sloane’s capital at risk and Sloane does most of the work, yet both receive the same. Had they agreed the salary and 8% interest on capital, the residual profit would be 48,000 - 15,000 - 4,000 - 800 = £28,200, giving Ryder £18,100 and Sloane £29,900. A written agreement lets the reward match each partner’s capital and effort.

The income statement

A partnership’s income statement is prepared exactly as for a sole trader, with one difference: interest on a partner’s loan is an expense. The loan is a debt of the firm, so its interest is charged before profit for the year is found. The loan itself is a non-current liability (or current, if repayable within 12 months), not part of capital.

The appropriation account

The appropriation account follows the income statement and shows how the profit for the year is shared. Partners’ salaries and interest on capital are not expenses; they are shares of profit.

Worked example: Lowe, Marsh and Nash. The profit before loan interest for the year ended 31 March 2026 was £84,900. Nash has lent the firm £15,000 at 6% a year. The agreement provides:

• interest on capital at 5% a year: capitals Lowe £60,000, Marsh £40,000, Nash £20,000
• interest on drawings: Lowe £600, Marsh £450, Nash £300
• a salary for Nash of £18,000
• residual profit shared Lowe 3 : Marsh 2 : Nash 1.

Loan interest is 15,000 x 6% = £900, so profit for the year is 84,900 - 900 = £84,000.

Appropriation account for the year ended 31 March 2026
                                         £        £
Profit for the year                            84,000
Add Interest on drawings: Lowe          600
                          Marsh         450
                          Nash          300     1,350
                                               85,350
Less Interest on capital: Lowe        3,000
                          Marsh       2,000
                          Nash        1,000    (6,000)
     Salary: Nash                             (18,000)
Residual profit                                61,350
Share of profit: Lowe (3/6)          30,675
                 Marsh (2/6)         20,450
                 Nash (1/6)          10,225    61,350

Check: 6,000 + 18,000 + 61,350 = 85,350, which is the profit plus interest on drawings. Interest on drawings is added because it is charged to the partners; it increases the profit available to share.

If the residual figure is negative, salaries and interest are still credited in full. The residual loss is then shared in the profit-sharing ratio and debited to the partners.

Capital and current accounts

There are two ways to keep partners’ accounts.

• Fixed capital accounts hold only the capital introduced (or withdrawn by agreement). Every appropriation and all drawings go to a separate current account. This is the usual method.
• Fluctuating capital accounts: there is no current account, so all appropriations and drawings go straight to the capital account, whose balance changes every year.

Worked example: current accounts. Continuing the firm above, current accounts at 1 April 2025 were Lowe £2,400 credit, Marsh £1,100 credit and Nash £800 debit. Drawings were Lowe £30,000, Marsh £24,000, Nash £28,000.

Current accounts
                     Lowe   Marsh    Nash                   Lowe   Marsh    Nash
                        £       £       £                      £       £       £
Balance b/d             -       -     800  Balance b/d     2,400   1,100       -
Interest on drawings  600     450     300  Int. on capital 3,000   2,000   1,000
Drawings           30,000  24,000  28,000  Salary              -       -  18,000
Balance c/d         5,475       -     125  Share of profit 30,675  20,450  10,225
                                           Balance c/d         -     900       -
                   36,075  24,450  29,225                 36,075  24,450  29,225
Balance b/d             -     900       -  Balance b/d     5,475       -     125

Marsh’s current account has a debit balance of £900: he has drawn more than the opening balance plus everything credited to him this year.

The equity section of the statement of financial position shows both sets of accounts:

                         Lowe    Marsh    Nash       Total
                            £        £       £           £
Capital accounts       60,000   40,000  20,000     120,000
Current accounts        5,475    (900)     125       4,700
                                                   124,700

Nash’s loan of £15,000 appears under non-current liabilities, not here.

Changes in partnership

When a partner joins or leaves, the old profit-sharing arrangement ends. Two things must be settled first, both in the old ratio, because they arose while the old partners owned the firm.

Revaluation of assets

Assets (and liabilities) are restated at current values through a revaluation account:

• increase in an asset: debit the asset, credit revaluation
• decrease in an asset (or increase in a liability or provision): debit revaluation, credit the asset or liability
• a credit balance is a profit, credited to the old partners’ capital accounts in the old ratio; a debit balance is a loss, debited in the same way.

The revalued figures then appear in the new statement of financial position.

Goodwill

Goodwill is the amount by which the value of the whole business exceeds the net value of its separate assets, from its reputation, customers and staff. An old partner gives up a share of that goodwill when a partner joins, and a retiring partner leaves it behind, so each must be credited for it.

If the goodwill is not kept in the books (the usual instruction):

1. Debit goodwill, credit old partners’ capital accounts in the old ratio.
2. Debit the continuing partners’ capital accounts in the new ratio, credit goodwill.

The goodwill account closes to nil. If the question says goodwill is kept, do only step 1 and show goodwill as a non-current asset.

Worked example: admission of a partner

Fox and Gale share profits 3 : 2, with capitals of £40,000 and £30,000. On 1 January 2026 Hart is admitted and pays £25,000 into the bank as capital. Premises are revalued upward by £15,000 and inventory down by £2,000. Goodwill is valued at £20,000 and will not be kept. The new ratio is Fox 2 : Gale 2 : Hart 1.

• Revaluation profit: 15,000 - 2,000 = £13,000; shared 3 : 2 gives Fox £7,800, Gale £5,200.
• Goodwill created 3 : 2: Fox £12,000, Gale £8,000.
• Goodwill written off 2 : 2 : 1: Fox £8,000, Gale £8,000, Hart £4,000.

Capital accounts
                    Fox     Gale    Hart                   Fox     Gale    Hart
                      £        £       £                     £        £       £
Goodwill          8,000    8,000   4,000  Balance b/d   40,000   30,000       -
Balance c/d      51,800   35,200  21,000  Bank               -        -  25,000
                                          Revaluation    7,800    5,200       -
                                          Goodwill      12,000    8,000       -
                 59,800   43,200  25,000                59,800   43,200  25,000

Check: closing capitals total £108,000 = old capitals 70,000 + Hart’s cash 25,000 + revaluation profit 13,000. Goodwill created and written off cancel out in total. In effect Hart has paid £4,000 of his cash for a share of goodwill, which Fox received.

Worked example: retirement of a partner

Irwin, Jay and Kemp share profits 2 : 1 : 1. Kemp retires on 31 December 2025. Capitals are Irwin £45,000, Jay £30,000, Kemp £25,000; Kemp’s current account has a credit balance of £3,200. Property rises in value by £12,000 and equipment falls by £4,000. Goodwill is £24,000 and is not kept. Irwin and Jay will then share 3 : 2. Kemp receives £10,000 in cash and the rest is left as a loan.

• Revaluation profit £8,000, shared 2 : 1 : 1: £4,000, £2,000, £2,000.
• Goodwill created 2 : 1 : 1: £12,000, £6,000, £6,000; written off 3 : 2 by Irwin £14,400 and Jay £9,600.
• Kemp’s current account balance is transferred to his capital account.

Capital accounts
                  Irwin      Jay     Kemp                 Irwin      Jay     Kemp
                      £        £        £                     £        £        £
Goodwill         14,400    9,600        -  Balance b/d   45,000   30,000   25,000
Bank                  -        -   10,000  Current a/c        -        -    3,200
Loan - Kemp           -        -   26,200  Revaluation    4,000    2,000    2,000
Balance c/d      46,600   28,400        -  Goodwill      12,000    6,000    6,000
                 61,000   38,000   36,200                61,000   38,000   36,200

Kemp is owed £36,200. The £26,200 not paid becomes a liability of the firm, and any interest on it is an expense in later income statements.

Commenting on partnership statements

“Comment” questions want judgements drawn from the figures. Useful points:

• whether each partner’s total share (salary + interest + residual) reflects the capital and work they contribute
• whether drawings exceed a partner’s share, shown by a falling or debit current account; this drains cash from the firm
• how a large loan from a partner affects gearing and the cash needed for interest
• whether a new partner’s capital and the goodwill payment are fair to the existing partners.

Common errors

• Putting interest on a partner’s loan in the appropriation account instead of the income statement.
• Deducting interest on drawings in the appropriation account; it is added.
• Treating a partner’s salary as wages in the income statement.
• Sharing revaluation profit or goodwill in the new ratio. Creation is always in the old ratio.
• Writing goodwill off in the old ratio, so the old partners’ capitals end unchanged and the new partner pays nothing for goodwill.
• Forgetting to transfer a retiring partner’s current account balance before calculating the amount due.
• Leaving residual profit unshared when it is negative.
• Assuming salaries or interest apply where the question says there is no agreement.

Next steps

Condense the methods with the revision notes, then test yourself on the practice questions. For the wider set of skills examined on Paper 1, see AQA A-level Accounting exam preparation.

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.