The capital account of partners can be kept in either of the following ways:
- Fixed capital method
- Fluctuating capital method
Fixed Capital Method
Under the fixed nature of capital, each partner’s capital remains constant from the start of the partnership until its conclusion. No adjustments, such as interest on capital, salary/commission, or profit or loss earned during the operation, are made.
To record all such adjustments, each partner’s current account is opened and debited with drawings, the share of loss sustained during a period.
Credit is given for the partner’s salary/commission, interest on capital, and share of the profit earned.
After all the adjustments have been made, the account is balanced if it shows a debit balance in the balance sheet on the asset side, and a credit balance on the liability side.
At the time of dissolution of the partnership, each partner’s current account balance is transferred to the capital account.
The credit balance of the current account will be credited to the capital account, and the debit balance of the current account will be debited to the respective capital account.
Fluctuating Capital Method
Under this method, the capital of each partner changes from time to time. Each partner will have a separate capital account, which will be credited by their initial investment.
Any additional capital introduced during the year will also be credited to their capital account.
All the adjustments resulting in a decrease in the capital will be debited to the partner’s capital, such as drawings made by each partner, interest on drawings, and share of loss.
On the other hand, adjustments resulting in increased capital will be credited to the partner’s capital, such as interest on capital, salary, the share of profit, and so on.
The balance of each partner’s capital account will be shown on the balance sheet. The debit balance of the partner’s capital account is shown on the asset side, and the credit balance is shown on the liability side.
Explanatory Note: It should be noted that where nothing is specifically mentioned, the adopted capital method will be the fluctuating capital method.