CAPITAL ACCOUNTS?

All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts. This includes the amount of money brought in as capital, withdrawal of capital, share of profit, interest on capital, interest on drawings, partner’s salary, commission to partners, etc.

Methods:

  • Fixed capital method, and
  • Fluctuating capital method.

 

Difference Point:

The difference is identified from the fact that if the transactions other than addition / withdrawal of capital is recorded in the capital accounts of the partners or not.

 

Transactions Types:

For our easy learning and clarity, we divide the transactions in to two types: –

  • Addition / Withdrawal of Capital
  • Other Transaction (This includes –)
    • Share of Profit and Loss
    • Interest on Capital
    • Drawings
    • Interest on Drawings
    • Salary to Partners
    • Commission to partners
    • Interest on Loans.
    • Anything other than Addition / Withdrawal and the points not already covered above.

 

Fluctuating Capital Method:

  • Only one account is maintained for partner’s transaction, i.e., capital account.
  • All Additions / Withdrawal of Capital goes in this account.
  • All other transactions (Other than Additions/ Withdrawal of Capital) are posted through this account.
  • The balance of the capital account fluctuates from time to time on account of other transactions. That is why it is named as Fluctuating Capital Method.
  • This is the default method of preparing capital accounts. Means if nothing is specific with regard to how to prepare capital accounts, we follow fluctuating method.

 

Fixed Capital 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the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn.
  • All other transactions items like share of profit or loss, interest on capital, drawings etc. are recorded in a separate account, called Partner’s Current Account.
  • The partners’ capital accounts will 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.
  • Two accounts are maintained for each partner viz., capital account and current account.

 

Templates

Fluctuating Capital (Everything in one account )

 

 

 

Fixed Capital Method ( Two Accounts – Capital + Current A/C)

 

 

Summary – Difference between Fixed Vs Fluctuating

 

CriteriaFixedFluctuating
BalanceRemains Fixed unless there is addition or withdrawal of Capital (Not drawings)Keeps on Fluctuating
Cr. / Dr.Capital will show credit balance (Liability)May be debit or credit depending upon the other transactions. Balance could go on Asset side or liability side as well.
No 2 Accounts (Capital & Current)One single account
Capital TransactionCapital introduction and withdrawal both goes in this accountCapital introduction and withdrawal both goes in this account
Non-Capital transactionsGoes to Current AccountAll goes here