Methods of Capital Accounts

Methods of Capital Accounts

Amount in cash or kind brought in by the partner to manage business activities is termed as Capital. Partners maintain and operate some methods of the Capital Accounts. The two methods of Capital Accounts are discussed below.

Methods of Capital Accounts

Fixed Capital Method:

In this method the amount of capital of a partner remains the same at the end of that financial year. There is no addition or subtraction from capital during the year. When this method is adopted partner's open a new account in the name of the partner's Current Account and all the related to capital adjustments are solved through the Partner's Current Account. For example, Drawings. Interest on Drawings, Interest on Capital, Partner's Salary, Commission, Brokerage, Share of Profit and Losses are recorded in the Current Account.

Fixed Capital Method

Journal Entries

1)  When additional capital is introduced by a partners
Cash / Bank A/c ..................... Dr. 

To Partners Capital A/c
(Being additional capital introduced into the business)

2)  When capital amount is brought in by a Partner in form of Assets
Assets A/c .................. Dr. 

To Partners Capital A/c
(Being additional capital brought in kind)

Partner's Current Accounts:

When fixed capital method is adopted by the partnership firm, a new separate account is opened i.e. 'Partner's Current Account'. In this account all adjustments related to capital are recorded. Partner's Current Account may show debit or credit balance.

1)  Drawings made by the partner in the current accounting year

2)  Goods or any assets taken over by the partner.

3)  Interest on partners capital allowed by the firm.

4)  Interest on partners drawings charged by the firm.

5)  Salary, Commission etc. payable to the partner.

6)  Distribution of Profit or Loss of the firm.

Partner's Current Accounts:

1)  Interest allowed on partner's capital

a)  Interest on Capital A/c ............................................................Dr. 

To Partners Capital A/c/ Current Account

(Being interest due on capital)

b)  Profit and Loss A/C ................................................................Dr

To interest on Capital A/C

(Being interest on Capital transferred to profit and loss account)

2)  Salary or Commission allowed to partners

a)  Salary or Commission in Partner A/c.....................................Dr. 

To Partners Current A/c / Capital Account ....................

(Being Salary or Commission due for payment)

b)  Profit and Loss A/C ................................................................Dr

To Salaries/ Commission A/C ......................................... 

(Being Salary/ Commission transferred to Profit and Loss A/C)

3)  Cash or Goods taken over by the partners for their personal use.

a)  Drawing A/c............................................................................Dr. 

To Cash or Goods A/C

(Being cash or goods withdrawn for personal use)

b)  Partners Current A/c / Capital A/c..........................................Dr

To Drawing A/c

(Being balance on account transferred to current A/c)

4)  Interest charged on drawing of the partners

a)  Partners Current A/c / Capital A/c..........................................Dr. 

To Interest on Drawing account

(Being interest charged on Drawing)

b)  Interest on Drawings A/C ....................................................... Dr

To Profit and Loss A/C

(Being interest on Drawings transferred to profit and loss account)

5) Transfer of Net Profit

Profit and loss A/c ..........................................................................Dr. 

To Partners Current A/c / Capital A/c

(Being profit transferred to Partner's Current / Capital Account)

6) Distribution of Net loss :

Partners Current A/c / Capital A/c ..................................................Dr. 

To Profit and Loss A/c

(Being loss adjusted to Partners Current / Capital Account)

Fluctuating capital method :

In this method, the amount of capital balance changes every year. It is called the fluctuating capital method. In this method the partner's current account is not opened. Hence all adjustments are solved through Capital Account. Following are the general adjustments related to capital.

1)  Initial or Opening Balance of capital

2)  Additional Capital brought in by the partners in Cash or in kind.

3)  Salary / Commission payable to partner

4)  Interest payable on capital balance to partner

5)  Drawings made during the year and interest payable on drawings by the partner

6)  Withdrawal of part of the capital by the partner

7)  Division and transfer of net disposable profit or net adjustable loss of the firm.

Proforma of Fluctuating Capital Method.

Proforma of Fluctuating Capital Method