Question

State the two methods of maintaining Capital Accounts of partners.

Answer 1

There are two methods of maintaining capital Accounts.

1. Fixed Capital Method:- In this method two accounts of each partner are maintained i.e Capital and Current Account. Balance in Capital Account remains the same except when new capital is introduced or withdrawn. All adjustments like profit,loss,interest on capital,drawings,salary,commission etc are made through current account. The capital account will always have a credit balance while current account may have a debit and credit balance.

2. Fluctuating Capital Method:- In this method, only one account is maintained i.e Capital Account. The balance in capital account changes every year because of all adjustments like profits/losses,drawings,interest,salary etc. Fluctuating capital account may sometimes show a debit balance.