Introduction
Each partner in a partnership business has a capital account which records their investment in the business.
There are two main methods used to maintain partners’ capital accounts.
Methods of Maintaining Capital Accounts
- Fixed Capital Method
- Fluctuating Capital Method
Fixed Capital Method
Under the fixed capital method, the capital account balance remains unchanged unless additional capital is introduced or capital is withdrawn.
Items such as drawings, profit share, interest on capital and partner salaries are recorded in a separate account called the Current Account.
Example – Fixed Capital Account
Fluctuating Capital Method
Under the fluctuating capital method, all transactions affecting the partner’s interest in the business are recorded directly in the capital account.
These include profit share, drawings, interest on capital and partner salaries.
Example – Fluctuating Capital Account
Difference Between the Two Methods
- Fixed capital remains unchanged during the year
- Fluctuating capital changes each year
- Fixed capital uses a separate current account
- Fluctuating capital records everything in one account
Practice Question
Partner A introduced capital of 50,000 and Partner B introduced capital of 40,000.
During the year:
- A's share of profit = 8,000
- B's share of profit = 6,000
- A drawings = 3,000
- B drawings = 2,000
Calculate the closing capital balances using the fluctuating capital method.
Quick Check
Which method uses a current account?
- Fixed Capital Method
- Fluctuating Capital Method
Show Answer
Correct Answer: Fixed Capital Method