Partnership Agreement (Cambridge International IGCSE Accounting)

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 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 salaries are paid to each partner

    • And the amount to be paid

  • Whether partners are entitled to drawings and the limit each partner can take out of the business

  • Whether 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 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

Why might a partner provide a loan to the business instead of increasing their capital investment?

• A partner might provide a loan to the business because the loan is repayable

• The partner is then guaranteed income from the repayments each year

• The partner might not want to invest more capital in order to avoid:

  • having to alter the partnership agreement
  • having money tied up in the business