What is Partner’s Capital Accounts?
Partner’s Capital account is that account which records the transactions that takes place between partners and the firm. A separate capital account is maintained for each partner. For example, there are three partners in a firm say, A, B, C. There will be three capital account – A’s capital account, B’s capital account, C’s capital account.
Methods to Maintain Partner’s Capital Accounts
There are two methods of maintaining partner’s capital method. They are as follows –
- Fixed Capital Accounts Method
- Fluctuating Capital Accounts Method
1. Fixed Capital Method
In fixed capital method, the capital of the partners remain constant. If you are following fixed capital method, then you have to prepare two accounts namely Capital account and Current Account for each partner.
Capital Accounts: Fixed capital means the capital remains unaltered that is it is fixed, till additional capital is not introduce in the business or some withdrawal is made from the existing capital. Capital account of the partners will continue to show the same balance year after year.
Current Accounts: Current account is maintained to record the transactions other than the introduction and withdrawal of capital such as interest on capital, interest on drawings, salary or commission to partner, share of profit/losses. So, the balance of current account keeps on fluctuating because of the following reasons:
- Share of profits is credited.
- Drawings are debited.
- Salary or commission is credited.
- Share of losses is debited.
- Interest allowed on partner’s capital accounts is credited.
- Interest charged on drawings is debited.
2. Fluctuating Capital Method
Under Fluctuating Capital Method, one one account is prepare that is Capital accounts of the partners. They are fluctuating as they alter with every debit or credit. Debit or credit could be because of salary, commission, profits, losses, etc. So, if you are following this method, capital account with credit balance appears on liabilities side. On the contrary, capital account with credit balance appears on the assets side of the Balance Sheet.
Note – If the question is silent about the method of preparing partner’s capital accounts, then partner’s capital account is prepared following Fluctuating Capital Accounts Method.