Journal Entries Under Fluctuating and Fixed Capital Methods

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 7, 2021

Interest on Capital

According to the Partnership Act, no interest is provided on capital, but if it is agreed upon among the partners, it will be provided at an agreed rate.

Interest on capital is not an expense of the business. That is to say, it is not deducted from the total income to arrive at the net income. It is a part of the profit-sharing scheme.

The journal entry for interest on capital is as follows:
Journal Entry for Interest on Capital

Drawings

To record each partner’s drawings, a separate drawing account is maintained for each individual. Generally, a maximum withdrawal limit is established.

According to the Partnership Act, no interest on drawings is charged unless there is an agreement amongst the partners to the contrary.

If the partners have agreed to charge interest on drawings, the entry is made as follows:
Journal Entry for Interest on Drawings

Partner’s Salary

According to the Partnership Act, no partner is entitled to any salary. However, if there is an agreement in place, a partner may be allowed a salary for their work to the firm.

A partner’s salary is not an expense of the business (i.e., it is not deducted from the total income to arrive at the net income). It is a part of the profit-sharing scheme.

The journal entry for partner’s salary is made as follows:
Journal Entry for Partner's Salary

Partner’s Commission

Sometimes, commission is allowed to the partners. The commission is transferred to the partner’s account by way of the following journal entry:
Journal Entry for Partner's Commission

Partner’s Profit or Income

The profit or income of the partnership is distributed among the partners. The following journal entry is passed to transfer the profit to a partner’s account:
Journal Entry for Partner's Profit or Income

Partner’s Loss

The loss of partnership is suffered by the partners. The following journal entry is made to transfer the loss to the partner’s account:
Journal Entry for Partner's Loss

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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