All transactions associated with partners of an enterprise are maintained in the books of an enterprise via their capital accounts. This incorporates the amount of money pulled in as withdrawal of capital, capital, interest on capital, the share of profit, partner’s salary, commission to partners, interest on drawings, etc.,
There are 2 procedures by which the capital accounts of partners can be recorded. Namely :
- Fixed capital method
- Fluctuating capital method
Also Read: What is Working Capital in Accounting?
The distinction between these two lies in whether the transactions other than addition/withdrawal of capital are maintained in the capital accounts of the partners.
- Fixed Capital Method: Under the fixed capital process, the amounts of the partners will remain fixed except additional capital is brought in and introduced or a portion of the capital is withdrawn according to the agreement among the partners.
- Fluctuating Capital Method: Under the fluctuating capital process, only one account, that is capital account is recorded and maintained for every partner. All the adjustments namely – interest on capital, the share of profit and loss, interest on drawings, drawings, commission to partners or salary, etc. are recorded in the partners’ capital accounts. This causes the balance fluctuation in the capital account from time to time. In the non-appearance of any guidance, the capital account must be outlined by this method.
Must Read: Fixed Capital vs Working Capital
The above mentioned is the concept that is explained in detail about the Maintenance of Capital Accounts of Partners for the class 12 students. To know more, stay tuned to BYJU’S.