Accounting Treatment of Partner’s Capital Account: Admission of a Partner (Fixed Capital)

Last Updated : 05 Apr, 2023

Capital is the amount contributed by the partners in the firm. Partner’s capital shows equity in a partnership that is owned by specific partners. It records the initial and subsequent contribution made by each partner and also the withdrawal made by the partner. Partner’s Capital Account shows the ownership interest in the firm by each partner of the firm. Partner’s Capital Account can either be fixed or fluctuating. It records all the transactions related to the partnership firm and the partners. All the initials transaction and share profit or loss made by the firm, and also the gains or revenue and loss incurred by the firm are recorded in the share of each partner in their capital account.

Methods of Maintaining Capital Account

Fixed Capital Method:

Fixed Capital means that the capital of the partners is affixed and stationery. Capitals of the partners do not change with every transaction and remain the same. It changes only when there is additional capital introduced or drawings are made(withdrawal of capital) by the partner. Two separate accounts are maintained- Partner’s Capital Account and Partner’s Current Account. Partner’s Capital Account is credited with capital contributed and additional capital introduced and debited with withdrawal made by the partner. Partner’s Current Account is debited or credited by the transaction with the firm other than the one directly relating to Capital Account.

Fluctuating Capital Method:

Fluctuating Capital means that the capitals of the partners fluctuate and are irregular. Capitals of the partners change with every transaction and do not remain the same. Only one capital account is maintained under fluctuating capital method. All the transactions of the partners are recorded under one head separately in the name of each partner, i.e., Partner’s Capital Account. The account is debited or credited by the transactions with the firm relating to the partner.

Meaning of Fixed Capital Method

Fixed Partner’s Capital Accounts Method is the method of maintaining capital accounts of a firm under which the amount of capital of each partner is fixed and only changes in case of a permanent increase or permanent decrease in the capital. There is an increase in capital when additional capital is introduced into the firm by the partner and a permanent decrease in the capital when the concerned partner withdraws from his capital. Under this method, two accounts are maintained:

1. Partner’s Capital Account

2. Partner’s Current Account

Capital Account: The Capital Account records only those transactions that are related to capital or change in the capital (Additional Capital and Drawings). In the capital account, the capital brought in by the partner is credited, and any drawing is debited.
Current Account: A separate account known as a Current Account or Drawings Account is opened to record all the other transactions related to partners, such as Interest on capital, Interest on drawings, salary, Profit/loss share, etc. Any income or profit of the partner is credited, and any expense or loss is debited to the current account.

Steps of Fixed Capital Method

Step 1: Capital Balance of the old partners is brought down on the credit side.

Step 2: Capital brought in by the new partner is credited to his capital account.

Step 3: Cash/Bank is debited(when capital is withdrawn) or credited (on introduction of capital) on adjustment of old partners capital account.

Step 4: Balance of the capital accounts(difference between credit and debit side) of each partner is carried forward.

Step 5: Balance of the Current A/c is bought down and written on the debit side (if it has a debit balance) or on the credit side (if it has a credit balance).

Step 6: Premium for Goodwill brought in by the new partner admitted is credited to the old partner’s capital account in sacrificing ratio.

Step 7: Revaluation balance is credited (on profit ) or debited (on loss) to the old partner’s capital account in the old profit-sharing ratio.

Step 8: Accumulated profit and reserves are credited, and accumulated loss and deferred expenditure are debited to the old partner’s capital account in the old profit-sharing ratio.

Step 9: Calculate the total of both sides, and the difference between the debit and credit sides is carried forward as the Current A/c balance of all the partners, respectively.

Format of Fixed Capital Method:

** denotes that the balance of the Current A/c can be either Debited or Credited.

Illustration:

X and Y are partners in the firm, sharing profit and loss in the ratio of 2:1. The Balance Sheet of the firm on 31st March 2022 was as follows:

M was admitted into partnership on 1st April 2022 for $\frac{1}{3}rd$ share in the firm on the following basis:

1. ₹45,000 will be brought in by M as his share of capital.

2. M will bring his share in Goodwill which is valued at ₹27,000 on the date of admission of M.

3. Plant and Machinery will be depreciated by 10%, and Building will be appreciated by 15%.

4. Provision on Debtors to be created to ₹1,445 on debtors.

5. There is a liability of ₹3,500 included in Sundry Creditors that will not arise.

6. Half of the Investment is taken over by G.

7. An outstanding Salary of ₹1,800 and accrued income of ₹1,200 are to be brought into books of accounts.

Prepare Revaluation Account, Partner’s Capital Account(under Fixed Capital Method), Balance Sheet of the Firm after the above adjustment on the date of admission of the new partner.

Solution: