Partnership Agreement (Edexcel IGCSE Accounting)

Spec point — IGCSE_ACCOUNTING:S4.162

Partnership agreement

What is a partnership agreement?

• A partnership agreement is a document that sets out the terms of how the partnership should operate
• Its purpose is to help partners avoid disagreements in the future

What is contained in the partnership agreement?

• The agreement contains information about:

  • The amount of capital each partner is to invest

  • Whether or not the partners are entitled to interest on their capital

    • And if so, the percentage to be paid
    • Interest on capital is given to reward partners for investing their money into the business

  • Whether or not salaries are paid to each partner

    • And the amount to be paid

  • Whether or not partners are entitled to drawings and the limit each partner can take out of the business

  • Whether or not interest is charged on partners' drawings

    • And if so, the percentage to be charged
    • Interest on drawings is charged to discourage partners from withdrawing money from the business

  • Whether or not the partners are entitled to interest when they loan their own money to the business

    • And if so, the percentage to be paid
    • Interest on loans is given to reward partners for loaning their money to the business

  • The distribution of profits and losses to be shared between partners

• Interest and salaries do not involve physical money

  • The amounts are added to the balances that the business owes the partners
  • The partners can choose to withdraw these amounts as drawings

What if a partnership agreement does not exist?

• If a partnership agreement does not exist, then Section 24 of the Partnership Act 1890 is followed

  • Profits and losses are divided equally between the partners
  • Partners do not receive a salary
  • No interest is paid on the partners' capital
  • No interest is charged on the partners' drawings
  • Partners receive 5% interest per annum on partners' loans