Partnerships (Cambridge (CIE) IGCSE Accounting)

Revision Note

Partnerships

What is a partnership?

  • A partnership is a business in which two or more people operate as owners with the main purpose of making profits

  • Normally a partnership consists of two to twenty partners 

  • Sometimes a partnership is formed when a sole trader wishes to expand or grow their business

  • Two or more sole traders may decide to combine together their resources such as money and assets to form a new business

What are the advantages of operating as a partnership?

  • Forming a partnership is relatively easy as formal permission is not required to set it up

  • Partners have access to additional finance because all partners contribute to raising the capital of the business

  • Partners have access to each other's skills and expertise

    • For example, a makeup artist might partner up with a hairstylist

  • Partners share the risks of operating the business

  • Partners can cover each other for sickness and holidays 

What are the disadvantages of operating as a partnership?

  • Profits are shared among all partners

    • Unlike a sole trader who keeps all the profits, partners will share it  

  • Partners may find that they have disagreements 

  • Partners may take longer to come to decisions about the operating activities of the business due to them having different opinions

  • All partners are responsible for the debts of the business

    • Even if the debt was only created by one of the partners

Examiner Tips and Tricks

In the exam on the structured written paper, you may be asked to advise a sole trader whether or not they should form a partnership with another sole trader. You should state two advantages of operating a partnership and two disadvantages of operating as a partnership and then make a recommendation.

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

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