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Providing Interest on Capital

If interest o...

Question

If interest on capital, salary to the partner and share of profit are credited while interest on drawings, drawings and share of loss are debited to the Partners' Capital Accounts, what is the method followed to maintain the Capital Accounts?

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Solution

If the interest on capital, salary to partner and share of profit are credited while interest on drawings and share of loss are debited to the Partner's Capital account then the method followed for maintaining the capital accounts is 'Fluctuating Capital' method. Under this method all entries relating to the partners are made in the partner's capital itself and the capital of the partners keeps on changing from time to time.

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