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.
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 |
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