CAPITAL ACCOUNTS OF PARTNERS

ACCOUNTING FOR PARTNERSHIP FIRMS

LESSON - 5

PARTNERS CAPITAL ACCOUNTS

            As business has a separate legal entity, that is the business and its owner are considered as two different entities. The partnership firm maintains the transaction details of its partners individually in an account named as capital account. Capital accounts shows the details of partner's transactions - the things he needs to receive (credited) and the things which reduces his payments (debited). Normally partner's capital account has a credit balance and it is shown in the liabilities side of the balance sheet, it is a due amount for the firm as it has to be paid back to the partners invested.

PARTNER'S CAPITAL ACCOUNT CAN BE MAINTAINED IN TWO WAYS:

1) FIXED CAPITAL  ACCOUNTS METHOD

            The firms which does not want its partner's capital accounts to be altered follows this method, in this method the capital invested by the partners remain same and unaltered by the functioning of the business. The transactions related to the functioning of the business will be entered in an another account.

 

            Under this method we need to prepare two accounts

            - Capital Account and 

            - Current Account 

            - CAPITAL ACCOUNT

            Partners capital account shows the money invested by the partners as capital. Usually capital account under fixed capital method shows the same balance every year as all the other transactions will be entered in another account. Only two types of transactions possibly affect this account under this method, they are:

            - Additional capital introduced during the year which will be credited to the account and

            - Capital withdrawn (drawings out of capital) during the year which will be debited to the account

            Capital accounts will always show a credit balance as there should be money left in the business to operate it year after year.

FORMAT OF CAPITAL ACCOUNT

Dr.                                                 PARTNERS CAPITAL ACCOUNT                                        Cr.

Particulars	A’s capital a/c - amount	B’s capital a/c - amount	Particulars	A’s capital a/c - amount	B’s capital a/c - amount
Any drawings (drawings out of capital)   Balance left	XXXX       XXXX          TOTAL	XXXX      XXXX          TOTAL	Capital invested   Any additional capital added	XXXX      XXXX           TOTAL	XXXX    XXXX            TOTAL

              

           - CURRENT ACCOUNT

            As the transactions related to the business operation are not entered in capital account under this method, it needs a separate account so all those transactions will be entered in an another account named current account. The transactions related to business operations like interest on capital, interest on drawings, salary, commission etc will be entered in this account. The transactions which are due to the partner has to be credited and the transactions for which the partner has to pay will be debited to the current account respectively. As current account records all the transaction both favorable and unfavorable, it may have a debit or credit balance.

            A credit balance in current shows the amount the firm needs to pay the partners, so it should be shown in the liabilities side of the balance sheet. A debit balance in the current account denotes the partner has used more money than that is available to him and he has to pay back to the firm, so it will be shown in the asset side of the balance sheet.

FORMAT OF CURRENT ACCOUNT

Dr.                                                PARTNERS CURRENT ACCOUNT                                    Cr.

Particulars	A’s capital a/c - amount	B’s capital a/c - amount	Particulars	A’s capital a/c - amount	B’s capital a/c - amount
Capital invested (it can be debit or credit balance)   Items partner needs to pay     . drawings (out of profit)     . interest on drawings     . any loss   Balance left (it can have debit or credit balance)	XXXX            XXXX    XXXX        XXXX       XXXX            TOTAL	XXXX             XXXX    XXXX      XXXX       XXXX          TOTAL	Capital invested (it can be credit or debit balance)   Items partner needs to receive     . interest on capital     . commission/ salary     . any profit   Balance left (it can have credit or debit balance)	XXXX              XXXX    XXXX      XXXX               TOTAL	XXXX             XXXX   XXXX       XXXX                TOTAL

 

Note : As current account records all the transaction related to the business operations, it may have a debit or credit balance.

2) FLUCTUATING CAPITAL ACCOUNTS METHOD

            If the firm wants to show all its transactions in a same account then this method is followed. Under this method all the transactions whether it is related to the partner's capital or to the business operations, all will be recorded under a same account. This method maintains only one account named

capital account to record it all transactions. Under fluctuating capital method capital account records transactions like additional capital, drawings, interest on capital, interest on drawings, salary, commission etc. All the transactions for which the partner has to receive amount will be credited and for which he needs to pay will be debited to the capital account

            Under fluctuating method capital account may have both debit or credit balance. If capital account has a debit balance then it has to be shown in the asset side of the balance sheet and if it has a credit balance then it has to be shown in the liabilities side of the balance sheet.

            Normally partnership firms follow fluctuating capital method so if the question does not state any particular method the student can follow fluctuating capital method.

FORMAT OF CAPITAL ACCOUNT under fluctuating capital method:

Dr.                                              PARTNERS CAPITAL ACCOUNT                                                    Cr.

Particulars	A’s capital a/c - amount	B’s capital a/c - amount	Particulars	A’s capital a/c - amount	B’s capital a/c - amount
Capital invested (it can be debit or credit balance)   Drawings made out of capital     Items partner needs to pay     . drawings (out of profit)     . interest on drawings     . any loss   Balance left (it can have debit or credit balance)	XXXX            XXXX            XXXX       XXXX    XXXX          XXXX             TOTAL	XXXX            XXXX              XXXX       XXXX    XXXX          XXXX           TOTAL	Capital invested (it can be credit or debit balance)   Additional capital introduced     Items partner needs to receive     . interest on capital     . commission/ salary     . any profit   Balance left (it can have credit or debit balance)	XXXX           XXXX          XXXX   XXXX   XXXX          XXXX              TOTAL	XXXX           XXXX              XXXX  XXXX  XXXX          XXXX              TOTAL