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Difference between Fixed Capital Account and Fluctuating Capital Account

Last Updated : 14 Mar, 2024
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The Partner’s Capital Account is an account that records all the transactions between the Partnership firm and the partners. The Capital Account is prepared to determine the partners’ share in the firm at the end of the accounting period. Every item of the partner’s concern, right from their initial capital investment to their share in the profit of the firm is recorded in the capital account. The Capital Account aims to promote transparency and accuracy between the firm and the partners and among the partners. The capital investments are credited, and drawings are debited in the Capital Account. Similarly, the Incomes and profits of the partners are recorded on the Credit side of the capital Account, and the expenses/ losses are debited. There are two methods to maintain the Capital Account:

  1. Fixed Capital Account
  2. Fluctuating Capital Account

Difference-between-Fixed-Capital-Account-and-Fluctuating-Capital-Account-copy

What is Fixed Capital Method?

Under Fixed Capital Method, the initial capital introduced by the partners at the beginning is considered to be fixed throughout the lifespan of the firm, except in the event of Additional capital introduced and permanent withdrawal of the capital (drawings). A separate account known as a Current Account is prepared to record other transactions like Interest on Capital, Interest on Drawings, Salary, Commission, Share of profit, etc.

The fixed capital account is the method in which two accounts are made for each partner,

  • Partner’s Capital account: The partner’s capital account is only used to record the partner’s capital, additional capital and permanent drawings.
  • Partner’s Current Account,: To record all other transactions of the partners regarding withdrawals, capital gains, commissions, wages, division of losses or profits, etc., a current account of the partner is created..

Therefore, the Capital Account is completely unaffected in this method. If no capital is withdrawn or added during the annual year, the capital account remains unchanged and remains the same during the year. Therefore, it is called as Fixed Capital Method.

What is Fluctuating Capital Method?

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, 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.

All adjustments resulting in a capital reduction are shown on the Debit side of the capital account. For example, drawings of partners and interest are debited from the capital account. All adjustments resulting in a Capital increase are recorded on the credit side of the Capital Account.

Difference between Fluctuating Capital Method and Fixed Capital Method

Basis

Fixed Capital Method

Fluctuating Capital Method

Meaning

Under Fixed Capital Method, ┬áthe capital of the partners is considered fixed and all the adjustments related to the partner’s capital are done through a separate account known as Current A/c. Under the Fluctuating Capital Method, ┬áthe capital of partners constantly fluctuates and no separate account is made for all the adjustments related to the partner’s capital.

No. of Accounts

Two accounts are maintained under the fixed capital method, i.e., Capital Account and Current Account. In Fluctuating Capital Account, it consists of only one account known as the Capital Account.

Presentation in Balance sheet

Capital Account and Current Account both are shown in the fixed capital account method. In this method, only the Capital account appears on the balance sheet.

Adjustments

All the adjustments related to the partner’s capital are done through the Partner’s Current Account except for the permanent withdrawal of capital and additional capital. In this method, all the adjustments are done in the partner’s capital account itself.

Balance

Capital Account always shows credit balance whereas Current Account can either show credit or debit balance. Capital Account always shows a credit balance.

Partnership Deed

In the Partnership Deed, the fixed capital account method must be specified particularly. In the partnership deed, it is not mandatory to mention about this.

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