Apply partnership agreements and statutory defaults
Read the partnership’s agreed terms first, then identify the relevant Partnership Act 1890 defaults when no term overrides them.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover objective 1.5.3: partnership statements and appropriation, capital and current accounts, agreements and the stated Partnership Act 1890 defaults. Partnership accounting after a change of partners is A Level Topic 3.1.2 and is not covered here. Practice is self-checked, not an official Cambridge grade; full timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.2 double-entry system and Topic 1.5.1 adjustments. Keep business profit separate from the partners’ appropriation of that profit and from cash drawings.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A question states a 3:2 profit-sharing agreement. Should you replace it with an equal split because of the Act default?
What you will learn
- Identify common clauses in a partnership agreement
- Evaluate the benefits and limits of written terms
- Apply the syllabus-listed Partnership Act defaults accurately
The agreement controls the stated accounting arrangement
A partnership agreement can state each partner’s capital contribution, profit- and loss-sharing ratio, salaries, interest on capital and drawings, decision-making powers, duties, admission or retirement arrangements, dispute procedures and how the business may end. The question may supply only the clauses relevant to its calculations.
Clear written terms reduce uncertainty and give partners a shared reference when responsibilities or distributions are disputed. Drafting and updating an agreement takes time and may involve professional cost; ambiguous or outdated terms can create new disputes. An agreement cannot remove every commercial risk or guarantee that partners will agree.
Treat statutory rules as defaults, not as the partners’ chosen deal
For this syllabus, apply the Partnership Act 1890 rules only where there is no express or implied agreement to the contrary. The default is equal sharing of capital, profits and losses, no partner salary for acting in the business, and no interest on contributed capital before profits are ascertained.
An actual loan or advance for the partnership beyond the capital the partner agreed to subscribe carries 5% annual interest from the date of that payment or advance under the stated Act provision, unless the partners have agreed otherwise. Do not confuse that loan interest with interest on capital.
Interest on drawings is not one of the statutory default entitlements listed in section 24: charge it only when the partnership’s terms require it. The Act and examination treatment are a learning scope here, not individualized legal advice about a real partnership.
Pause and explain
A partner lends $10,000 to the firm beyond their agreed capital, and no different loan term is given. Which syllabus-listed default applies?
Worked example
A and B have no written agreement. A contributed twice as much agreed capital as B. They earn a profit, and A worked full time. Apply the syllabus-listed defaults and identify what the facts do not allow you to assume.
Show the worked solution
- Without an overriding express or implied term, the statutory default is equal sharing of profit, not sharing in proportion to capital.
- The Act default does not provide a salary merely because A worked more hours.
- Do not award interest on capital before profits are ascertained; check whether either partner made a separate loan advance beyond agreed capital.
- The partners can agree different terms, so obtain and follow any agreement the question supplies.
Answer On the stated facts alone, the default is an equal profit share and no salary for A. A’s larger agreed capital does not by itself change the profit ratio or create pre-profit capital interest. Check for any express or implied term and any separate loan advance.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A partnership agreement is silent on salary, profit sharing and interest on drawings. Profit is $24,000; two partners have different capital balances. What can you conclude under the syllabus-listed defaults?
Give me a hint
Separate each missing term, then avoid inferring terms from capital balances.
Compare my reasoning
- Profit is shared equally when no contrary agreement is present.
- No salary is due by default just for working in the business.
- Do not charge interest on drawings unless the partners’ terms require it; different capital balances alone do not change the default profit split.
Share the $24,000 equally: $12,000 each. No salary is due by default, and interest on drawings should not be invented. The different capital balances do not change the default profit split.
Look for these in your work
- Equal default applied
- No-salary default applied
- Drawing-interest term not invented
A partner pays an urgent $4,000 partnership bill personally, and the agreement has no expense-reimbursement clause. Explain what information is needed before recording a partner loan and why the Act’s 5% loan rule cannot be applied automatically to every payment.
Give me a hint
Check whether the payment is an actual advance beyond agreed capital and whether it was made for the partnership.
Compare my reasoning
- Confirm the payment was for the partnership’s ordinary and proper conduct or preservation.
- Distinguish reimbursement of a business expense from a loan or advance beyond subscribed capital.
- Only if it is an actual qualifying advance does the stated 5% annual default need consideration, subject to any contrary agreement.
Verify the nature and purpose of the $4,000 payment and whether it is recorded as a reimbursable business payment or as an actual loan advance. The 5% default applies to a qualifying advance beyond agreed capital, not automatically to every expense a partner pays.
Look for these in your work
- Business purpose checked
- Expense versus loan distinguished
- Scope of 5% default qualified
Two partners say a written agreement is unnecessary because the statutory defaults cover everything. Give a balanced evaluation using the terms most likely to affect the accounts.
Give me a hint
Consider both the disputes avoided and the limits of relying on defaults.
Compare my reasoning
- A written ratio, salary, capital-interest and drawing-interest policy makes distributions predictable.
- A written agreement can also clarify duties, decision rights, changes in membership and dispute processes, beyond the immediate accounts.
- Drafting costs time and money, and unclear or outdated terms still need review; partners should obtain suitable professional advice for a real arrangement.
Written terms can reduce uncertainty about profit shares, salaries, interest and governance. They take time and may incur professional cost, and they do not eliminate all disputes. The statutory defaults are a fallback, not a tailored agreement for the partners’ needs.
Look for these in your work
- Accounting clauses evaluated
- Governance terms included
- Cost and limits acknowledged
Common mistakes
- Assuming profit is shared in proportion to capital contributions
- Applying the Act default when the question provides a different agreement
- Treating a partner’s loan advance as subscribed capital or as a profit share
What can you explain now?
Under the syllabus-listed Partnership Act default, how is profit shared if no contrary agreement exists?
Compare with the explanation
Equally
The default equal-sharing rule applies unless an express or implied agreement changes it.
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Make it stick
Name three matters a partnership agreement can state and two defaults that apply only if the partners have not agreed otherwise.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.