Fixed and Fluctuating Capital Accounts

Every partner's capital contribution has to be recorded somewhere, and the firm's books can do this in either of two ways: the Fixed Capital Method or the Fluctuating Capital Method. Both are tested directly in BIEAP Intermediate Accountancy practice questions, often on the very same set of figures, so a student needs to be equally comfortable preparing either.

Fluctuating Capital Method. Under this method — the DEFAULT method where the partnership deed is silent on which method to use — a single Capital Account is maintained for each partner, and EVERY transaction connecting a partner to the firm's profit (interest on capital, salary, commission, share of profit, drawings, interest on drawings) is posted directly into that one account. As the name suggests, the balance "fluctuates" — changes — every single accounting year, since it keeps absorbing new additions and deductions on top of whatever it closed at the previous year.

Fixed Capital Method. Under this method, the Capital Account is deliberately kept undisturbed at the amount the partner actually contributed as capital — it changes ONLY when the partner introduces genuinely fresh capital or permanently withdraws part of the capital itself, never for routine yearly items. All the routine yearly items — interest on capital, salary, commission, share of profit, drawings, interest on drawings — are instead posted into a SEPARATE Current Account opened for each partner. A partner's Current Account can carry a debit (partner owes the firm) or a credit (firm owes the partner) balance, and unlike the Capital Account, it genuinely fluctuates every year; the Capital Account, true to its name, stays fixed unless capital itself is added or withdrawn.