Understanding business partnerships is an important element of CAT Scheme Papers 3 and 6, Professional Scheme Paper 1.1, and new ACCA Qualification Paper F3. This article looks at the ways in which partnerships are formed, structured, and accounted for. DEFINITIONS Partnership A partnership is a business formed by a minimum of two people who pool their resources together towards a common goal. Partnerships are generally formed through verbal arrangements or by deed – a legally binding document, drawn up by the partners, which safeguards their interests in the case of a dispute or misunderstanding. In lieu of a deed, the partnership is governed by local law (for example, the Partnership Act 1890 in the UK). The law does not offer solutions that would be contrary to the wishes of partners. Instead, it provides a set of standard procedures which can be followed by any partnership, and are therefore not tailored to any individual partnership. Partnership agreement This is the agreement made among the partners – the policies, formulated by the partners, under which the partnership business will be governed. Some of the principles that might be covered under such an agreement include: share of profit and loss rate of interest on partners’ capital, and on any loans or advances salary to be paid to partners interest on drawings working schedule and specialisation. In the absence of a partnership agreement, local law would come into effect. As an example, in the UK, the Partnership Act of 1890 sets out the following principles: profit or loss should be shared equally between partners no salary should be paid to partners no interest on drawings should be charged to partners no interest should be credited to partners for their capital invested 62 student accountant January 2007
accounting for partnerships relevant to CAT Scheme Papers 3 and 6, Professional Scheme Paper 1.1, and new ACCA Qualiﬁcation Paper F3
any loans and advances, apart...