Question

M/s. RSA maintains Partners' Capital Accounts under Fixed Capital Accounts Method. Accountant of the firm has credited their salary and interest on capital to their Capital Accounts. Do you agree with the treatment? Give reasons for your answer.

Answer 1

For maintaining the capital accounts of the partner two methods are prescribed :- Fixed Capital Method and Fluctuating Capital Method. Under Fixed Capital Method there are two separate accounts i.e Capital account and Current account. Capital account remains fixed year to year except when there is an introduction of new capital or withdrawal.

In fluctuating Capital method only one account is maintained that is capital account and every adjustments are made through this account.

M/s. RSA maintains partners' Capital Accounts under Fixed Capital Accounts Method.As a result of which he has to make every adjustments through current account only without affecting the capital account. So,the treatment by the accountant to credit their salary and interest on capital to capital accounts is wrong.