Partnership Capital Account
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:
- Fixed Capital Account
- Fluctuating Capital Account
(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.
Format of Fixed Capital Account
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:
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capital account remains unchanged except when either fresh capital is introduced or the excess capital is permanently withdrawn.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
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
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.
Difference between Fixed Capital and Fluctuating Capital Account
|Fixed Capital Account||Fluctuating Capital Account|
|Partner’s Current Account is maintained||Partner’s Current Account is not maintained|
|The balance of capital accounts remains fixed during an accounting year unless fresh capital is contributed or excess capital is withdrawn by any partner||The balance of capital account fluctuates during an accounting year as adjustment of drawings, interest on drawings, interest on capital, salary of a partner etc. are made in this account.|
|Adjustment for interest on drawings, interest on capital, salaries etc. are not made in capital account.||All adjustments are made in the capital account.|
Example # 1:
On 1st January 2019, Jawad and Kamran enter into partnership business, contributing cash Rs. 600,000 and Rs. 400,000 respectively and sharing profits in the ratio of 3:2. Kamran is to be allowed a salary of Rs. 12,000 per year. Interest on capital is to be allowed at 10% per annum. 5% interest is to be charged on the drawing. During the year Jawad withdrew Rs. 20,000 and Kamran Rs. 10,000 (withdrawals were made at 1st, July 2019). According to Profit and Loss Appropriation Accounting, the profit of Jawad is Rs. 45,000 and Kamran Rs. 30,000, for the year of 2019.
Requirements: Show the capital accounts of partners assuming:
(a) If Fixed Capital Account is maintained
(b) If Fluctuating Capital Account is maintained
Solution (a): Fixed Capital Account
Solution (b): Fluctuating Capital Account
>>> Read Current Assets
Journal Entries related to Partnership Capital Account
Journal entries are need before preparation of partnership capital accounts.
(1) Transfer of Drawings Journal Entry
(2) Interest on Drawings Journal Entry
(3) Fresh Capital Introduce Journal Entry
(4) Excess Capital withdrawal Journal Entry
(5) Interest on Capital Journal Entry
(6) Salary / Commission Journal Entry
>>> Read Current Assets
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.