Capital Accounts (Fixed and Fluctuating)

23/01/2021 0 By indiafreenotes

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.

In the case of Partnership Capital Account of all partnership maintained mandatory. In sole proprietorship, capital account of the sole proprietor is maintained and net profit or loss is transferred to his/her capital account. But in the case of a partnership firm, capital is contributed by all partners and capital account of every partner is maintained separately. Capital account partnership may be:

(1) Fixed Capital Account

In case of fixed capital account, balance of capital in the beginning of the year, fresh capital introduced during the current year is recorded credit site and permanent withdrawal of excess capital and closing balance of capital are recorded on debit site of the capital account. There is always a credit balance in the capital account of a partner, which is shown on equities site of balance sheet. Following is format of fixed capital account.

Under the fixed nature of capital, the capital of each partner remains constant from the start of partnership till at the end of it. No adjustments like interest on capital, partner’s salary/commission, Drawings and profit or loss earned during the operation is made.

To have record of all such adjustments each partner’s current account is opened, which is debited with Drawings, share of loss sustained during a period and credit is given for partner’s salary/commission, interest on capital and share of profit earned.

After all the adjustments have been made in the current A/c., it is balanced, if it shows debit balance it will be shown in the balance sheet on asset side and if it shows credit balance it will be shown on the liability side.

At the time of dissolution of the partnership, each partner’s current account balance is transferred to capital A/c. The credit balance of current account will be credited to capital account and debit balance of the current account will be debited to respective partners’ capital account.

Format of Fixed Capital Account

Partners’ Capital Account

Description

Amount

Description

Amount
Bank Account $$$$$ Balance b/d $$$$$
(Permanent withdrawl of excess capital) (Capital contributed till last year)
Balance c/d $$$$$ Bank Account $$$$$
(Balance of capital at the end of year) (Fresh Capital introduced by partner)
Total $$$$$ $$$$$$

To record, drawing made by a partner and his share in allocation of profit etc. an account known as Partner’s Current Account is opened. The format of Partner’s Current Account is as follows:

Partners’ Current Account

Description

Amount

Description

Amount
Bank b/d $$$$$ Balance b/d $$$$$
(In case of Debit opening balance) (In case of Credit opening balance)
Drawing Account Salary Account $$$$$
Interest on Drawing Account Interest on Capital Account $$$$$
Profit and Loss Appropriate Account Profit and Loss Appropriate Account $$$$$
(For Share of Loss) (For share of profit)
Balance c/d $$$$$ Balance c/d $$$$$
(In case of Credit closing balance) (In case of Debit closing balance)
Total $$$$$ $$$$$$

The closing balance of a partner’s current account is shown on equities side, in case of credit balance; and in case of debit balance, it is shown on assets side.

It may be noted that in case of fixed capital, the balance of capital account remains unchanged except when either fresh capital is introduced or the excess capital is permanently withdrawn. Moreover, the word ‘fixed’ is not prefixed to capital account of a partner because maintenance of partner’s current account implies that capitals are fixed.

(2) Fluctuating Capital Account

Under this method as is apparent from the name, capital of each partner goes on changing from time to time. Each partner will have his separate capital account, which will be credited by his initial investment and any additional capital introduced during the year will also be credited to his capital account.

All the adjustments, which result decrease in capital will be debited to partner’s capital, such as drawing made by each partner, interest on drawings and share of loss. On the other hand, adjustments resulting increase in capital will be credited to partner’s capital, like interest on capital, partners salary if any, partner’s share of profit etc.

Balance of each partner’s capital account will be shown in the balance sheet. Debit balance of partner’s capital account is shown on the asset side and credit balance is shown on the liability side.

If current accounts of partners are not maintained, the transactions relating to drawings by partners and their share in allocation of profit including interest on capital, interest on drawings, salary payable to partners, commission payable to partners etc. are recorded in partner’s capital account. In that case, the balance of capital account will fluctuate from year to year and capital accounts in the case are known as Fluctuating Capital Account. None-preparation of current accounts implies capital accounts are fluctuating. The Fluctuating Capital Account Format is given below:

Fluctuating Capital Account Format

Partners’ Current Account

Description

Amount

Description

Amount
Balance b/d Balance b/d $$$$$
(In case of Debit opening balance) (In case of Credit opening balance)
Bank Account $$$$$ Bank Account $$$$$
(Permanent withdrawal of excess capital) (Fresh capital introduced by pertner)
Drawing Account Salary Account $$$$$
Interest on Drawing Account Interest on Capital Account $$$$$
Profit and Loss Appropriate Account Profit and Loss Appropriate Account $$$$$
(For Share of Loss) (For share of profit)
Balance c/d $$$$$ Balance c/d $$$$$
(In case of Credit closing balance) (In case of Debit closing balance)
Total $$$$$ $$$$$$

Generally, the closing balance of capital account is Credit and it is recorded on equities site of balance sheet. But if a partner’s capital account reveals a debit closing balance, is appears on asset site of balance sheet.