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Fixed, Fluctuating Capitals; Partners Current Accounts

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Partners Capital Accounts  
 
The first difference we can notice, between accounting for sole proprietary form of business organisation and partnership form of business organisation is with regard to capital and its related aspects.

In place of a single capital account, we see as many capital accounts as there are partners. In manual accounting and during the learning process, we prepare the partners capital accounts in a columnar form instead of showing each ledger account separately, to enable easier understanding.

Fluctuating Capital Accounts  
 
Interest on Capital, Salaries to Partners, Interest on Drawings, Commission to Partners, Partners Share of Profits are all amounts that belong to the partners. By Convention we credit/debit all these amounts relating to partners to their capital accounts. This would result in the balance in the Partners getting altered.

• Fluctuating Capital Accounts

Since the capital account balances changes (fluctuates) with the regular transactions relating to capital, the Capitals accounts maintained under this method are known as "Fluctuating Capital Accounts".

By convention this is the normal method adopted for maintaining capital accounts in problem solving, unless there is an instruction to the contrary.

DrPartners Capital a/c'sCr
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
To Int on Draw
To Drawings

To Bal c/d
1,000
20,000

2,82,700
100
2,000

1,94,350
750
15,000

2,34,950
By Bal b/d
By Int on Cap
By Salary
By Commission
By Profit Share
2,00,000
10,000


93,700
75,000
3,750
24,000

93,700
1,00,000
5,000

52,000
93,700
  3,03,700 1,96,450 2,50,700   3,03,700 1,96,450 2,50,700
        By Bal b/d 2,82,700 1,94,3500 2,34,950

• Capital Accounts : Affected by Capital Natured & Revenue Natured Transactions

Since all the transactions which affect the capital accounts are dealt with using the same capital account, we can say that Capital accounts are affected by transactions of both Capital Nature as well as Revenue Nature.

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Fixed Capital Accounts  
 

• Why another Type

Profits (revenue) increase capital. Capital also increases when additional capital is brought in by the partner. Under the fluctuating capital account system, the capital account gets affected by transactions of both capital and revenue nature. Thus both these transactions are recorded using the same capital account.

If the organisation intends to obtain the information relating to the Capital account balance on account of Capital natured transactions and Revenue Natured transactions separately, a separate Capital accounts needs to be maintained to record the revenue natured transactions.

The basic purpose of accounting is derivation of information
The more information we need, the more accounting heads we need to maintain.

• Fixed Capital Accounts

Where there is a need for greater information in relation to capital, the total information is divided into two areas and separate ledger accounts are maintained in relation to each area. This gives information relating to long term and short term aspects separately.

The transactions relating to the partners are classified as capital and current natured. In recording the transactions which are of current nature, a separate account by name "__ (Partners) Current a/c" is used instead of the "__ (Partners) Capital a/c".

Any transaction that relates to the appropriation of profits, drawings, etc., is considered current natured and is recorded through the Current accounts.

Those transactions which relate to bringing in and taking out capital are considered capital natured and are recorded through the Capital accounts. Capital Accounts have a fixed balance unless capital is either withdrawn or additional capital is contributed.

Since the capital account balance is more or less fixed, this method is called "Fixed Capital Method"

• Drawings » Current/Capital

Regular drawings as agreed upon among partners are also treated to be transactions of current nature and are thus recorded through the current accounts. This is on the premise that, as the firm keeps making profits, the partners would be entitled to withdraw and use some of the profits for their necessities.

Where there is a specific instruction to treat drawings as capital i.e. to be debited to the Capital accounts, it would have to be done accordingly.

The same information as shown in the capital accounts would appear as below if fixed capital accounts are maintained.

DrPartners Capital a/c'sCr
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
To Bal c/d 2,00,000 75,000 1,00,000 By Bal b/d 2,00,000 75,000 1,00,000
  2,00,000 75,000 1,00,000   2,00,000 75,000 1,00,000
        By Bal b/d 2,00,000 75,000 1,00,000

DrPartners Current a/c'sCr
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
Particulars A
(in Rs)
B
(in Rs)
C
(in Rs)
To Bal b/d
To Int on Draw
To Drawings

To Bal c/d

1,000
20,000

1,82,700

100
2,000

1,19,350

750
15,000

1,34,950
By Bal b/d
By Int on Cap
By Salary
By Commission
By Profit Share

10,000


93,700

3,750
24,000

93,700

5,000

52,000
93,700
  1,03,700 1,21,450 1,50,700   1,03,700 1,21,450 1,50,700
        By Bal b/d 82,700 1,19,350 1,34,950

Calculation of Interest on Capital  
 
The capital account balance considered for calculation of interest on capital is dependent on the method adopted for maintaining the capital accounts.
  • Fixed Capital Accounts

    Where the Capital Accounts are being maintained under "Fixed Capital Accounts" method, interest on capital is to be paid on the balances in the capital accounts. Interest on Current account balances is not considered unless there is a specific instruction regarding the same.
  • Fluctuating Capital Accounts

    Where the Capital Accounts are being maintained under "Fluctuating Capital Accounts" method, interest on capital is to be paid on the balances in the capital accounts as that is the only account that is related to capital.
Author Credit : The Edifier ... Continued Page 7

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