Worked example 1

Two accountants start a practice together, sharing profits 60:40. Which entity type and which extra financial statement is required compared to a sole trader?

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Entity: Partnership — deed should state 60:40 profit ratio.

Extra statement: Appropriation account after SPL — deduct salaries/interest on capital if any, then share residual profit 60:40.

SOFP: Show capital accounts and current accounts per partner (1.5.3).

Not a company unless they incorporate — unlimited liability unless LLP structure (syllabus: general partnership).

Worked example 2

Ali and Ben are in a partnership, sharing profits and losses in the ratio 3:2. Their fixed capital accounts are Ali $60,000 and Ben $40,000. For the year ended 31 December 2023, the partnership's net profit was $50,000. The partnership agreement provides for:

Interest on capital at 5% per annum.
An annual salary for Ali of $8,000.$
Interest on drawings to be charged: Ali $500, Ben$ 300.

Prepare the Partnership Appropriation Account for the year ended 31 December 2023.

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Partnership Appropriation Account for the year ended 31 December 2023

	$	$
Net Profit for the year		50,000
Add: Interest on drawings
Ali	500
---	---
Ben	300	800
		50,800
Less: Appropriations
Interest on capital
Ali (5% of $60,000)	3,000	$
---	---
Ben (5% of $40,000)	2,000	(5,000)
Partner's salary (Ali)		(8,000)
Residual Profit to be shared		37,800

Distribution of Residual Profit:

Total ratio parts: 3 + 2 = 5
Ali's share (3/5): (3 / 5) * $37,800 = **$ 22,680**
Ben's share (2/5): (2 / 5) * $37,800 = **$ 15,120**

Final Appropriation Statement:

	$	$
Residual Profit		37,800
Share of profit:
Ali		22,680
---	---
Ben		15,120
		(37,800)
		0

Types of business entity — practice questions

Worked example 1

Worked example 2