One of the many differences between a sole proprietorship and partnership form of business is the way the capital records are maintained. In case of sole proprietorship, only one capital account will be there, whereas in case of partnership, there can be different capital accounts for partners.
There are two ways of maintaining the partnership capital account and they are:
1. Fixed Capital Account
2. Fluctuating Capital Account
We will be discussing the fluctuating capital method in this article.
Fluctuating means one that is not stable or one that is changing frequently. The same can be said about the fluctuating capital account. Under the fluctuating capital account, the capital of the partners keeps on fluctuating.
The partners of the firm will have separate capital accounts and the capital accounts of each partner will be credited with the initial capital investment that is made individually by them and any additional capital investment done by them during the accounting period.
The different kinds of adjustments that result in decrease of the capital will be debited to the partners capital account. The examples of such adjustments include drawings by each partner, loss share of the partner or interest on drawings.
Similarly, the activities or adjustments that lead to increase in capital is credited to the partners capital account. Examples of such adjustments are salary of partners, interest received on capital and share of profit from the business for each partner.
The capital account balance of each partner is shown on the balance sheet with debit balance being reflected in the asset side and credit balance on the liabilities side.
Format of Fluctuating Capital Account
The format of fluctuating capital account is as follows.
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