A prognostic cloud fraction and prognostic condensate scheme has been developed for the Met Office Unified Model. This is designed to replace the scheme currently used in weather forecast and climate simulations, in which cloud fraction and liquid water content are calculated diagnostically. Such a scheme overprescribes links between cloud fraction, condensate and water vapour contents. By contrast, our new prognostic cloud fraction and prognostic condensate scheme (PC2) calculates increments to prognostic variables of liquid, ice and total cloud fractions, water vapour and liquid condensate as a result of each physical process represented in the model. (Ice condensate is already represented prognostically.) This paper provides a summary of the PC2 scheme, describes how it is implemented, and discusses its relationship with other existing cloud schemes. Key aspects of the PC2 formulation are: the consistent derivation of prognostic terms, the reversible nature of the scheme under idealised forcing scenarios, the well-behaved performance in the limit of very low and very high cloud fraction, the inclusion of ice microphysical processes, and the improved representation of cloud erosion processes. A companion paper presents the results from the scheme. © Crown Copyright 2008. Reproduced with the permission of Her Majesty's Stationery Office. Published by John Wiley & Sons, Ltd.