Exam code:4AC1
Partnership agreement
What is a partnership agreement?
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A partnership agreement is a document that sets out the terms of how the partnership should operate
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Its purpose is to help partners avoid disagreements in the future
What is contained in the partnership agreement?
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The agreement contains information about:
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The amount of capital each partner is to invest
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Whether or not the partners are entitled to interest on their capital
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And if so, the percentage to be paid
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Interest on capital is given to reward partners for investing their money into the business
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Whether or not salaries are paid to each partner
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And the amount to be paid
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Whether or not partners are entitled to drawings and the limit each partner can take out of the business
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Whether or not interest is charged on partners’ drawings
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And if so, the percentage to be charged
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Interest on drawings is charged to discourage partners from withdrawing money from the business
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Whether or not the partners are entitled to interest when they loan their own money to the business
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And if so, the percentage to be paid
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Interest on loans is given to reward partners for loaning their money to the business
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The distribution of profits and losses to be shared between partners
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Interest and salaries do not involve physical money
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The amounts are added to the balances that the business owes the partners
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The partners can choose to withdraw these amounts as drawings
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What if a partnership agreement does not exist?
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If a partnership agreement does not exist, then Section 24 of the Partnership Act 1890 is followed
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Profits and losses are divided equally between the partners
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Partners do not receive a salary
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No interest is paid on the partners’ capital
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No interest is charged on the partners’ drawings
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Partners receive 5% interest per annum on partners’ loans
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Responses