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 two methods by which the capital accounts of partners can be recorded and these are:
- 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 method the business maintains two different accounts which are related to the different kinds of transactions that take place in the capital of the partners. These two accounts are 1) Capital account and 2) Current account
Capital account is related to the basic transactions related to the partners capital whereas the current account is related to all the other capital related transactions like interest on drawings, interest on capital, salary to employees apart from initial investment, addition of new capital and withdrawal of capital.
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
This concludes the article on the topic of Maintenance of Capital Accounts of Partners, which is an important topic for students of Class 12 Commerce stream. For more such interesting articles, stay tuned to BYJU’S.