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

Last Updated : 05 Apr, 2023

Capital is the amount contributed by the partners in the firm. Partner’s capital shows equity in 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 capitals of the partners are affixed and they are stationary. 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 Fluctuating Capital:

Under the Fluctuating method of maintaining partners’ capital accounts, the capital balance of each of the partners fluctuates continuously and is not fixed. The reason behind such continuous fluctuation is that no separate account (Current Account) is prepared to record the income and expenses and profits/ losses of the partners. Every item of concern, such as Interest on Capital, Interest on Drawings, Salary, Commission, Share of profit, Additional Capital, Premium for Goodwill brought in by new partner, Revaluation profit, Accumulated profit and reserves, Gains made by a partner, etc., is recorded in the capital account itself. In case of no instruction is provided, the Fluctuating method should be used to prepare the Partner’s Capital Account.

Steps of Fluctuating Capital Method:

Step 1: Capital Balance of the old partners is brought down either on the debit side (if the partner has a debit balance) or on the Credit side (if the partner has a credit balance).

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

Step 3: Premium for Goodwill brought in by the new partner admitted is credited to the old partner’s capital account in sacrificing ratio.

Step 4: Revaluation balance is credited (if profit ) or debited (if loss) to the old Partner’s Capital Account in the old profit sharing ratio.

Step 5: 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 6: Cash/ Bank is debited(when capital is withdrawn) or credited (on introduction of capital) on adjustment of the old partners capital account on the admission of the new partner.

Step 7: Calculate the total of both sides and the difference between the debit and credit sides is carried forward as the capital balance of all the partners respectively.

Format (When the Capital is Fluctuating):

Illustration:

Akshaya and Abhishek were partners in the firm sharing profit and loss in the ratio of 5:3. The Balance Sheet of the firm on 31st March 2022 was as follows:

They admitted Abhijeet for 25% share in profits on the following terms:

A. Abhijeet brings capital proportionate to his share after all adjustments.

B. Abhijeet brought in ₹24,800 as his share of goodwill. Half of this sum is to be withdrawn by the old partners.

C. Half of the Investments were to be taken by A and B in their profit-sharing ratio and the remaining was valued at ₹32,000.

D. Furniture and Building are appreciated by 5% and 10% respectively.

D. Stock to be depreciated by 8% and Machinery to be depreciated by 4%.

E. It was found that the creditors included a sum of ₹9,500, which was not to be paid. An outstanding bill for repairs of ₹800 will be brought into the books.

F. Bank loan is paid off.

Prepare necessary ledger accounts on the date of admission of the new partner.

Solution: