Partners Capital Account - Class 12 Partnership Accounts Fundamental

on

What in this Article ??

  1. Partners’ Capital Accounts
  2. Fixed Capital Method
  3. Points to be Remember Regarding Fixed Capital Account
  4. Fluctuating Capital Method
  5. Distinction between Fixed and Fluctuating Capital Accounts
Partners’ Capital Accounts

All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts. The Partners’ Capital Accounts may be maintained according to the

  1. Fixed Capital Method or
  2. Fluctuating Capital Method.
1.    Fixed Capital Accounts Method:

Under this method, capitals of partners remain unchanged except under special circumstances. In the case of fixed capital, two accounts are maintained for each partner, viz., (i) Fixed Capital Account, and (ii) Current Account.

(i) Fixed Capital Account: The balance in each partners’ capital account will show same balance in all year. The balance will change only when the partners introduce capital or drawings are made out of capital.

Fixed Capital Account cannot have a debit balance, i.e., negative balance.

(ii) Current Account: All adjustments regarding drawings, interest on drawings, salary, interest on capital, commission and share of profits or losses are made in Current Account. Thus, balance of Current Account fluctuates with every such transactions.

Partners’ Current Capital Account may have debit balance or credit balance.

Current Account will be debited by the following items

  1. Drawings against profit
  2. Interest on drawings
  3. Share of loss
  4. Transfer of amount to Capital Account

Similarly, Current Account will be credited by the following items.

  1. Interest on capital
  2. Remuneration / Commission
  3. Share of Profit
  4. Transfer of amount from Capital Account
Points to be Remember Regarding Fixed Capital Account
  • Fixed Capital Account cannot have a debit balance, i.e., negative balance.
  • Partners’ Current Capital Account may have debit balance or credit balance.
  • Balance in Partners’ Capital Account shown in the Liabilities side of Balance Sheet.
  • Credit Balance of Current Shown in Liabilities side of Balance Sheet.
  • Debit Balance of Current Shown in Assets side of Balance Sheet.
2.    Fluctuating Capital Method

Under this method, a single Capital Account for each partner is maintained. All transactions relating to it or withdrawals are credited and debited to this account. As a result, the balance in the Capital Account fluctuates with every transaction.

  • Credit Balance of Current Shown in Liabilities side of Balance Sheet.
  • Debit Balance of Current Shown in Assets side of Balance Sheet.
  • Normally Fluctuating Capital Method is followed for maintaining Capital Accounts
  • If question is silent, partner’s capital should be assumed to be fluctuating.
Distinction between Fixed and Fluctuating Capital Accounts

The main points of differences between the fixed and fluctuating capital methods can be summed up as follows:

Illustration

A and B are partners with capitals of Rs.15,00,000 and Rs. 10,00,000 respectively. They agree to share profits in the ratio of 3:2. Show how the following

transactions will be recorded in the capital accounts of the partners in case: (i) the capitals are fixed, and (ii) the capitals are fluctuating. The books are closed on March 31, every year.

Solution

(a) Under Fluctuating Capital Method

(b) Under Fixed Capital Method

Working Notes

Calculation for Interest on Capital

A: 5% on 15,00,000 for 1 Year = 15,00,000 x 5/100 = 75,000

     5% on 3,00,000 for 6 months = 3,00,000 x 5/100 x 6/12 = 7,500

Total Interest on A’s Capital = Rs. 82,500

B: 5% on 10,00,000 for 1 Year = 10,00,000 x 5/100 = 50,000

     5% on 2,00,000 for 6 months = 2,00,000 x 5/100 x 6/12 = 5,000

Total Interest on A’s Capital = Rs. 55,500

Comments

Post a Comment