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.

Partners Capital a/c's

DrCr
Particulars	A	B	Particulars	A	B
To Drawings	12,000	14,000	By Balance b/d	2,00,000	3,00,000

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.

Interest on Capital, Salaries to Partners, Interest on Drawings, Commission to Partners are appropriations of profits to ensure equitable distribution of profits based on the various contributions made by partners to the firm. Along with the Partners Share of Profits, these amounts conventionally are credited or debited to the Partner's capital accounts which would result in the balance in the Partners Capital accounts getting altered.

Fluctuating Capital Accounts

Fluctuate

• Having unpredictable ups and downs
• waver

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".

In problem solving, by convention, unless there is an indication to the contrary, we assume that capital accounts are fluctuating capital accounts.

Partners Capital a/c's

DrCr
Particulars	A	B	C	Particulars	A	B	C
To Interest on Drawings To Drawings To Balance c/d	1,000 20,000 3,42,700	100 2,000 2,44,350	750 15,000 2,74,950	By Balance b/d By Bank a/c By Interest on Capital By Salary to Partners By Commission to Partners By Distributable Profits	2,00,000 60,000 10,000 93,700	75,000 50,000 3,750 24,000 93,700	1,00,000 40,000 5,000 52,000 93,700
	3,63,700	2,46,450	2,90,700		3,63,700	2,46,450	2,90,700
				By Balance b/d	3,42,700	2,44,350	2,74,950

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 under the fluctuating capital method are affected by transactions of both Capital Nature as well as Revenue Nature.

Purpose

Profits (revenue) increase capital. By profits we mean all the appropriations of profits that find their way into the capital account, like interest on capital, salary to partner, commission to partner, share of profits. Capital also increases when additional capital is brought in by the partner which is a Capital natured transaction.

Under the fluctuating capital account system, since we use only a single capital account, it gets affected by transactions of both capital and revenue nature.

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.

Fixed Capital Accounts

Two ledger accounts are maintained for collecting information relating to capital. The transactions that affect partners capital accounts are classified as capital and current natured.

__ (Partners) Current a/c

Transactions relating to appropriation of profits and drawings are considered current natured and are recorded through an account named with the partners name suffixed with the term Current. Eg: X's Current a/c.

Partners Current a/c's

DrCr
Particulars	A	B	C	Particulars	A	B	C
To Interest on Drawings To Drawings To Balance c/d	1,000 20,000 1,42,700	100 2,000 1,69,350	750 15,000 1,74,950	By Balance b/d By Interest on Capital By Salary to Partners By Commission to Partners By Distributable Profits	– 10,000 93,700	– 3,750 24,000 93,700	– 5,000 52,000 93,700
	1,63,700	1,71,450	1,90,700		1,63,700	1,71,450	1,90,700
				By Balance b/d	1,42,700	1,69,350	1,74,950

__ (Partners) Capital a/c

Transactions relating to bringing in and taking out capital are considered capital natured and are recorded through the regular Capital account. Capital Accounts have a fixed balance unless capital is either withdrawn or additional capital is contributed.

Partners Capital a/c's

DrCr
Particulars	A	B	C	Particulars	A	B	C
To Balance c/d	2,60,000	1,25,000	1,40,000	By Balance b/d By Bank a/c	2,00,000 60,000	75,000 50,000	1,00,000 40,000
	2,60,000	1,25,000	1,40,000		2,60,000	1,25,000	1,40,000
				By Balance b/d	2,60,000	1,25,000	1,40,000

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

This gives information relating to long term and short term aspects separately.

are drawings - current or 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 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 calculated 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 calculated on the balances in the capital accounts as that is the only account that is related to capital.

In both cases any specific agreement between partners has to be considered in arriving at the balances and calculation of interests. Say if they agree to consider only the balance at the end for calculating interest, only that balance would be considered even if the partners have brought in additional capital or withdrawn capital during the accounting period.