Book-Keeping and Accountancy · Ch 1 — Introduction to Partnership and Partnership Final Accounts
Methods of Maintaining Partners' Capital Accounts
Methods of Maintaining Partners' Capital Accounts
Every partner's Capital Account records that partner's stake in the firm. There are two recognised methods of maintaining these accounts.
Fixed Capital Method
Under the Fixed Capital Method, the capital contributed by each partner remains fixed (unchanged) from year to year, except when a partner introduces additional capital or permanently withdraws part of the capital. All other adjustments — drawings, interest on capital, interest on drawings, salary/commission, and share of profit or loss — are recorded in a SEPARATE account called the Partner's Current Account, not in the Capital Account itself.
Fluctuating Capital Method
Under the Fluctuating Capital Method, only ONE account — the Capital Account — is maintained for each partner. Every adjustment (drawings, interest on capital, interest on drawings, salary/commission, share of profit or loss) is recorded directly in this single Capital Account, so its balance fluctuates (changes) every year.
Distinguishing the two methods
| Basis | Fixed Capital Method | Fluctuating Capital Method |
|---|---|---|
| Number of accounts per partner | Two — Capital Account AND Current Account | One — Capital Account only |
| Balance of the Capital Account | Remains fixed year after year (changes only on fresh introduction/permanent withdrawal of capital) | Changes (fluctuates) every year |
| Where drawings, interest on capital/drawings, salary and share of profit are recorded | In the Current Account | In the Capital Account itself |
| Can the account show a debit balance? | The Capital Account almost never does; the Current Account CAN show a debit balance (shown on the assets side of the Balance Sheet) | Yes — heavy drawings or a loss can bring the Capital Account itself to a debit balance |
| Which method applies if the deed is silent? | Not presumed — must be expressly agreed | Presumed by default, in the absence of any agreement to the contrary |
| Balance Sheet presentation | Capital AND Current Account balances shown separately for each partner | A single Capital Account balance shown for each partner |
A method under which each partner's Capital Account balance stays fixed year to year, with all other adjustments (drawings, interest, salary, profit share) recorded …
A method under which each partner has only one Capital Account, into which every adjustment is recorded directly, so its balance changes every year. This is the method presumed when a p …