Distinguish between the Fixed Capital Method and the Fluctuating Capital Method of maintaining partners' capital accounts, stating any three points of difference.

Question

Accepted Answer

| Basis of difference | Fixed Capital Method | Fluctuating Capital Method |
|---|---|---|
| Number of accounts | Two per partner — a Capital Account and a Current Account | One per partner — a single Capital Account |
| Capital Account balance | Remains constant, changing only when fresh capital is introduced or withdrawn | Changes every year as it absorbs interest, salary, drawings, and share of profit |
| Where routine items (interest on capital, salary, drawings, share of profit) are recorded | In the separate Current Account | In the Capital Account itself |
| Default method if the deed is silent | Not used unless specifically agreed | This IS the default method |
| Possibility of a negative (debit) Capital Account balance | Very rare, since routine items never touch it | Possible, if drawings and losses in a year exceed additions |

> [!ANSWER]
> Three key differences: (1) the fixed method uses two accounts per partner, the fluctuating method uses only one; (2) under the fixed method the Capital Account balance stays constant while the Current Account absorbs all routine items, whereas under the fluctuating method the single Capital Account itself absorbs everything and changes every year; (3) the fluctuating method is the legal default when the partnership deed does not specify which method to follow.

Q.Distinguish between the Fixed Capital Method and the Fluctuating Capital Method of maintaining partners' capital accounts, stating any three points of difference.

Concept understanding — Fixed and Fluctuating Capital Accounts

Basis of difference	Fixed Capital Method	Fluctuating Capital Method
Number of accounts	Two per partner — a Capital Account and a Current Account	One per partner — a single Capital Account
Capital Account balance	Remains constant, changing only when fresh capital is introduced or withdrawn	Changes every year as it absorbs interest, salary, drawings, and share of profit
Where routine items (interest on capital, salary, drawings, share of profit) are recorded	In the separate Current Account	In the Capital Account itself
Default method if the deed is silent	Not used unless specifically agreed	This IS the default method
Possibility of a negative (debit) Capital Account balance	Very rare, since routine items never touch it	Possible, if drawings and losses in a year exceed additions

Q.Distinguish between the Fixed Capital Method and the Fluctuating Capital Method of maintaining partners' capital accounts, stating any three points of difference.

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