PARTNER'S CAPITAL ACCOUNT
In Order to Start or Run the firm, Partners contribute their share of capital in the business. These are recorded in their respective accounts named as capital accounts.
Suppose there are three partners A, B, and C so there will be A’s capital account, B’s capital account, and C's Capital Account.
All transactions relating to partners of the firm are recorded in the books of the firm through their respective capital accounts.
This includes the amount of money brought in as capital, withdrawal of capital, the share of profit, interest on capital, interest on drawings, partner’s salary, commission to partners, etc.
The Capital accounts of Partners may be maintained in two ways :
1. Fixed Capital Method, or
2. Fluctuating Capital Method.
The difference between the Fixed Capital and Fluctuating Capital is whether or not the transactions other than the addition/withdrawal of capital are recorded in the capital accounts of the partners.
1. Fixed Capital Account Method
Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners.
In the case of fixed capital, two accounts are maintained for each partner, viz.,
(i) Capital Account, and
(ii) Current Account.
-All adjustments regarding drawings, interest on drawings, salary, interest on capital, commission, and share of profits or losses are made in the Current Account.
-The partners’ capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital.
-The partners’ current account, on the other hand, may show a debit or a credit balance.
-Partners’ capital accounts always appear on the liabilities side in the balance sheet, however, partners’ current account balance shall be shown on the liabilities side if they have a credit balance and on the assets side if they have a debit balance.
In a fixed capital account, the closing balance of the capital account is the same as that of the opening balance except when additional capital is introduced or there is permanent withdrawal during the current accounting year.
Format for Fixed Capital Account Method
2. Fluctuating Capital Method
Under the fluctuating capital method, only one account is maintained for each partner. (i.e. capital account)
All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners.
This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method.
Format for Fluctuating Capital Account Method
Note: If the question is silent or in the absence of any instruction, the partner’s capital is assumed to be fluctuating and should be prepared by this method.
Differences between Fixed and Fluctuating Capital Accounts
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