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karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners :- we will provide complete details of karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners in this article.

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners:-Partnership capital account

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The partnership capital account is an equity account in the accounting records of a partnership. It contains the following types of transactions:

  • Initial and subsequent contributions by partners to the partnership, in the form of either cash or the market value of other types of assets
  • Profits and losses earned by the business, and allocated to the partners based on the provisions of the partnership agreement
  • Distributions to the partners

The ending balance in the account is the undistributed balance to the partners as of the current date.

For example, if Partner Smith originally contributed $50,000 to a partnership, was allocated $35,000 of its subsequent profits, and has previously received a distribution of $20,000, the ending balance in his account is $65,000, calculated as:

$50,000 initial contribution + $35,000 profit allocation – $20,000 distribution

A partnership can maintain a single partnership capital account for all partners, with a supporting schedule that breaks down the capital account for each partner. However, it is easier over the long term to instead maintain separate capital accounts within the accounting system for each partner; by doing so, it is easier to determine the amount to be distributed to each partner in the event of a liquidation of the business or the departure of a partner, which in turn reduces the amount of discussion over payments and liabilities amongst the partners.

The amount of liquidating payment that a partner may eventually receive upon the termination of the business does not necessarily equate to the balance in the partnership capital account prior to the liquidation of the business. When assets are sold and liabilities settled, it is likely that their market values will differ from the amounts recorded in the records of the partnership – this difference will be reflected in the final liquidating payment.

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners:- Maintenance of Capital Accounts of Partners

All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts. This includes the amount of money brought in as capital, withdrawal of capital, share of profit, interest on capital, interest on drawings, partner’s salary, commission to partners, etc.

There are two methods by which the capital accounts of partners can be maintained. These are: (i) fixed capital method, and (ii) fluctuating capital method. The difference between the two lies in whether or not the transactions other than addition/withdrawal of capital are recorded in the capital accounts of the partners.

  • Fixed Capital Method: Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners. All items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in a separate accounts, called Partner’s Current Account. The partners’ capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital. The partners’ current account on the other hand, may show a debit or a credit balance. Thus under this method, two accounts are maintained for each partner viz., capital account and current account, While the partners’ capital accounts shall always appear on the liabilities side in the balance sheet, the partners’ current account’s balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance.
  • Fluctuating Capital Method: Under the fluctuating capital method, only one account, i.e. capital account is maintained for each partner. All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners. This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method. In the absence of any instruction, the capital account should be prepared by this method.

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners:- Distinction between Fixed and Fluctuating Capital Accounts

The main points of differences between the fixed and fluctuating capital methods can be summed up as follows:

Basis of Distinction Fixed Capital Account Fluctuating Capital Account
(i) Number of accounts Under this method, two separate accounts are maintained for each partner viz. ‘capital account’ and ‘ current account’. Each partner has one account, i.e. capital account, under this method
(ii) Adjustments All adjustments for drawings, salary, interest on capital, etc. are made in the current accounts and not in the capital accounts. All adjustments for drawings, salary interest on capital, etc., are made in the capital accounts,
(iii) Fixed balance The capital account balance remain unchanged unless  there is addition to or withdrawal of capital. The balance of the capital account fluctuates from year to year
(iv) Credit balance The capital accounts always show a credit balance. The capital account may sometimes show a debit balance.

karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners

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karnataka class 12 commerce Accountancy Maintenance of capital accounts of partners

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Important Note – Preparing for XI & XII Commerce?
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