Partnership accounts

Change in Partnership Agreement

Why Time-Apportion?

When a partnership agreement changes part-way through a financial year, the appropriation account must be split into two periods:

• Period 1: From the start of the year to the date of the change (old agreement or Partnership Act)
• Period 2: From the date of the change to the end of the year (new agreement)

Profit is divided between the two periods on a time basis (e.g. 3 months : 9 months).

Interest on a Loan Account

A partner's loan to the business is treated differently from their capital — loan interest is an expense, deducted from profit before the appropriation:

What Applies in Each Period

Worked Example — Astaire, Rogers and Flatley

Year ended 31 December 2020. New agreement introduced 31 March 2020. Period 1 = 3 months (Jan–Mar); Period 2 = 9 months (Apr–Dec). Total profit = £58,500; split: £14,625 (3/12) and £43,875 (9/12).

Astaire has a £12,000 loan account.

Appropriation account (split into two columns):

                              Period 1 (3m)    Period 2 (9m)
                                    £                £
Profit (time-apportioned)      14,625           43,875
Loan interest (Astaire):
  Act: 12,000 × 5% × 3/12       (150)
  New: 12,000 × 2.5% × 9/12                      (225)
                               14,475           43,650
Add: interest on drawings:
  Astaire (7,200 × 4% × 9/12)                    216
  Rogers  (7,000 × 4% × 9/12)                    210
  Flatley (5,200 × 4% × 9/12)                    156        582
                               14,475           44,232
Less: salary Rogers (12,000 × 9/12)             (9,000)
Less: interest on capital (× 6% × 9/12):
  Astaire (34,000)                              (1,530)
  Rogers  (34,000)                              (1,530)
  Flatley (24,000)                              (1,080)    (4,140)
Remaining profit               14,475           31,092

Split (Period 1 — equally 1/3):
  Astaire                      (4,875)
  Rogers                       (4,875)
  Flatley                      (4,875)          (14,625)

Split (Period 2 — ratio 2:1:1):
  Astaire (× 1/2)                              (15,546)
  Rogers  (× 1/4)                               (7,773)
  Flatley (× 1/4)                               (7,773)   (31,092)

Key Rules

• Time-apportion all amounts — salary, interest on capital, interest on drawings
• In the no-agreement period: no salary, no interest on capital, no interest on drawings — profits split equally
• Loan interest is always shown before the appropriation starts (it is an expense, not an appropriation)
• The total profit allocated across both periods must equal the profit for the year