Accounts of Partnership Firm

Capital Accounts
Methods of Maintaining Partners’ Capital
Accounts
1. Fixed Capital Method: Capital accounts are said to be
fluctuating when the balance of capital account of each
partner will not remain the same as the original amount, but
will fluctuate or change from year to year.
Under the fluctuating capital method, the capitals of
partners fluctuate from year to year. All the adjustments
such as drawings, interest on drawings, interest on capital,
salary or commission to partner, share of profit or loss, etc.,
are recorded directly in the capital account of the partner.
This makes the balance in the capital account to fluctuate
from year to year. Therefore, this method is called
fluctuating capital method.
Methods of Maintaining Partners’ Capital Accounts

2. Fixed Capital Method: Under the fixed capital

method, the original capital invested by the partner is
entered in the capital account and all other adjustments
like drawings, share of profit or loss, interest on capital,
interest on drawings, salary or commission payable to
partners, etc., are recorded in a separate account called
partners current account opened in the name of each
partner. Therefore, the capital of partners remains
constant or unaltered unless additional capital is
invested or capital itself is withdrawn by mutual
agreement.
Distinction between Fixed and Fluctuating
Capital Methods
Fixed Capital Method
1. Two separate accounts are
maintained for each partner viz.
‘capital accounts’ and ‘current
account’.
2. All adjustments like drawings,
salary, interest on capital, etc. are
made in the current accounts.
3. The capital account balance
remains unchanged unless there is
addition to or withdrawal of
capital.
4. The capital accounts always show a
credit balance.
Fluctuating Capital Method
1. Each partner has one account,
i.e., capital account.
2. All adjustments like drawings,
salary, interest on capital, etc.,
are made in the capital
accounts.
3. The balance of the capital
account fluctuates from year to
year.
4. The capital accounts may show
debit or credit balance.
Profit and Loss Appropriation Account
Meaning: The profit and loss appropriation account is
merely an extension or a continuation of usual profit
and loss account. The profit and loss appropriation is
the account which shows the appropriation of profits
of the firm or the distribution of profits of the firm
among the partners.
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