Partnership Agreement (Edexcel IGCSE Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
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
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