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.

Frequently Asked Questions

What are the two ways of maintaining a capital account in a partnership business organization?

The capital account of partners can be kept in either of the following ways: 1. Fixed capital method 2. Fluctuating capital method

What is the 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.

What is the fluctuating capital method?

Under fluctuating capital 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.

What are the differences between a fixed capital account and a fluctuating capital account?

The following are the differences between fixed capital account and fluctuating capital account: 1. A fixed capital account is a form of capital account in which a company holds two different accounts related to different types of transactions made in the capital of the partner.S fluctuating capital accounts, on the other hand, are a form of capital account in which the capital of a partner is constantly fluctuating. 2. Fixed capital account has two accounts which are capital account and current account. Fluctuating capital accounts, on the other hand, have only one account, which is a capital account.

What is the importance of using either of these methods?

The importance of using either of these accounts is that they contribute to the determination of the total cost of equity per share in a company. They are also used in determining the share capital surplus, dividend distribution, and taxes.

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