In view of the coronavirus pandemic, we are making LIVE CLASSES and VIDEO CLASSES completely FREE to prevent interruption in studies
Introduction to Partnership Accounting

Capital Accounts: Fixed and Fluctuating

A Capital Account is a general ledger account which shows some of the special transactions like proprietor’s investment in his own business,  the aggregate amount of earning, expenses of companies, etc. There are many more transactions which affect the Capital. Like: Interest on Capital, Interest on Drawings, Salaries to the Partners, Commission for the Partners, etc. These values are put in Profit and Loss Appropriation Account and at the same time credited or debited to their respective Capital Accounts.

Methods of Capital Account Creation

  • Fluctuating Capital Account Method
  • Fixed Capital Account Method

Fluctuating Capital Account Method

Firstly, fluctuate means anything having unpredictable ups and downs. Hence, under this method, the Capital of each Partner keeps on changing from time to time.

In a firm, there is a single account under the name “Capital” which shows all the necessary information about the different transactions related to the capital. It mostly starts with a credit amount of the capital invested by the partner in the initial time of the business.

Capital Account

All the adjustments leading to a decrease in the Capital are shown on the Debit side of the Capital Account. For example, Drawings by Partners and interest comes on the debit side of the Capital account. All the adjustments leading to an increase in the Capital are shown on the Credit side.

Format of Fluctuating Capital Account Method

Capital A/c

Date Particulars A B Date Particulars A B
Drawings and interest on Drawings Opening Balance or Initial Investment
Loss transferred from Profit and Loss A/c Addition of capital, Interest on Capital, Salary, Commission or any other remuneration
Closing Balance Profit transferred from Profit and Loss Appropriation A/c

Fixed Capital Account Method

Under this method, the firm prepares 2 accounts which show different transactions related to the capitals of the partners.

These two accounts are as follows :

(a) Fixed Capital Account

A firm prepares Fixed Account with very basic capital related transactions. Unlike the Capital account, under these repetitive capital related transactions does not affect the Capital balance. Like, Salary of employees, commission for employees, interest on capital, interest on drawings, etc.

The firm opens the account in the name of “Fixed Capital Account”. Initial Investment will appear on the credit side as the starting entry. Only 2 kinds of Capital related transactions can affect its balance :

(1) Addition of Capital

(2) Permanent Withdrawal of Capital

[Note: Sometimes even the Non-Permanent Withdrawals or Drawings are also included on the debit side of this account.]

Format of Fixed Capital Account

Capital Account

Date Particulars A B Date Particulars A B
Permanent withdrawal of capital Opening Balance
Closing Balance Addition of Capital

(b) Current Account

It includes all the capital related transactions other than the initial investment of capital, addition of capital and withdrawal of capital. Hence, It mainly includes items such as :

1. Interest on Capital

2. Interest on Drawings

3. Salaries and other remuneration to employees

4. Commission to employees and even more.

Hence, by preparing this account, we can let the main capital of the business “fixed”. As a result of which there is no fluctuation at all. Hence, the firm will be able to find out the exact reasons behind the change.

Format of Current Account

Date Particulars A B Date Particulars A B
Drawings and interest on drawings Opening Balance
Loss transferred from P&L A/c Interest on Capital, Salary, Commission or any other remuneration.
Closing Balance Profit transferred from P&L Appropriation A/c

 

Difference Between Fixed and Fluctuating Capital Methods

Fixed Capital Method Fluctuating Capital Method
Two accounts are prepared: Capital Account and Current Account Only a single account is prepared: Capital Account
The capital balance remains unchanged Capital balance fluctuates
Both Capital and Current Accounts appears in the Balance sheet. Only Capital Account appears in the Balance Sheet.
 If this method is used then it must be specified in the Partnership Deed.  If this method is used then it is not necessary to specify the method under the Partnership Deed
 Fixed Capital Account will always show a Credit Balance  Fluctuating Capital account may show debit balance as well.

Question on Capital Account

A is entitled to receive Rs.1,000 per month as Salary.

A’s Initial Capital Investment = Rs.1,00,000

B is entitled to receive Rs.1,500 per month as Commission.

B’s Initial Investment = Rs.2,00,000

How will we show the above items under:

(a) Fixed Capital Method

(b) Fluctuating Capital Method

Solution:

(a) Fixed Capital Method

Under Capital Account, Credit side will show the Initial Investment of partners A and B like :

Capital A/c

Date Particulars A B Date Particulars A B
By Bank/Cash A/c 1,00,000 2,00,000

Under Current Account, Credit side will show the items of fluctuating nature as follows:

Current A/c

Date Particulars A B Date Particulars A B
By Salary A/c 12,000
By Commission A/c 18,000

(b) Fluctuating Capital Method

Unlike the Fixed Capital Method, under this method, the firm will prepare only a single account. Capital A/c will cover all the capital related transactions.

Hence, all the entries will appear in this account only.

Capital A/c

Date Particulars A B Date Particulars A B
 By Bank A/c  1,00,000 2,00,000
 By Salary A/c  12,000
 By Commission A/c  18,000
Share with friends

Customize your course in 30 seconds

Which class are you in?
5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
tutor
tutor
Ashhar Firdausi
IIT Roorkee
Biology
tutor
tutor
Dr. Nazma Shaik
VTU
Chemistry
tutor
tutor
Gaurav Tiwari
APJAKTU
Physics
Get Started

2
Leave a Reply

avatar
1 Comment threads
1 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
2 Comment authors
Kksjashandeep singh brar Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
jashandeep singh brar
Guest
jashandeep singh brar

the content has been very helpful thank you very much

Stephanie
Guest
Stephanie

Please incase of a situation were you are asked to prepare an appropriation account were one partner is having two drawings what will you do..for example drawings of KAY 16,000 and 10,000 something like this 👈what will you do

Kks
Guest
Kks

I will dance

Stuck with a

Question Mark?

Have a doubt at 3 am? Our experts are available 24x7. Connect with a tutor instantly and get your concepts cleared in less than 3 steps.
toppr Code

chance to win a

study tour
to ISRO

Download the App

Watch lectures, practise questions and take tests on the go.

Get Question Papers of Last 10 Years

Which class are you in?
No thanks.