Page 31 - DEBKVOL-1

Chapter 2 Accounting for Partnership Firms—Fundamentals 2.3
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Methods of Maintaining Capital Accounts of Partners

The Partners’ Capital Accounts may be maintained according to the Fixed Capital Method or the Fluctuating
Capital Method.
Fixed Capital Accounts Method: Under this method, capitals of partners remain unchanged except under special
circumstances. In the case of fixed capital, two accounts are maintained for each partner, viz., (i) Fixed Capital
Account, and (ii) Current Account. All adjustments regarding drawings, interest on drawings, salary, interest on
capital, commission and share of profits or losses are made in Current Account. Fixed Capital Account cannot have
a debit balance, i.e., negative balance.
Fluctuating Capital Accounts Method: Under this method, a single Capital Account for each partner is maintained.
All transactions relating to it or withdrawals are credited and debited to this account. Be it introduction of capital,
interest on capital or drawings, salary, commission and share of profit and loss.
If question is silent, partner’s capital should be assumed to be fluctuating.
• Remuneration (Salary or Commission) to a Partner: Remuneration (Salary or Commission) to a partner is to
be allowed if the partnership deed or agreement provides for it.
A: Commission as percentage of the Net Profit or Distributable Profit before charging such commission:
Rate of Commission
Net Profit before Commission ×
100
B: Commission as percentage of the Net Profit or Distributable Profit after charging such commission:
Rate of Commission
Net Profit before Commission ×
100 +Rate of Commission
Remuneration (Salary or commission) to a partner being an appropriation of profit is transferred to the debit of
the Profit and Loss Appropriation Account and not to the debit of the Profit and Loss Account.
• Interest on Drawings: If the Partnership Deed so provides, interest on drawings is charged from the partners.
The interest so charged is credited to the Profit and Loss Appropriation Account and debited to the Partners’
Capital or Current Accounts.
• If dates of drawings are not given, interest on total drawings is calculated for average period, i.e., 6 Months.
• Interest @ 10% without the word ‘per annum’ means interest is to be calculated without any reference of time.
• Interest on Capital: Interest on capital is calculated on time basis, taking into consideration any additional
capital introduced or any existing capital withdrawn.
• Interest is allowed only if there is a provision in the Partnership Deed.
• As interest is an appropriation of profit, it is provided through Profit and Loss Appropriation Account instead
of Profit and Loss Account (except when it is a charge against profit).
Past Adjustments

Past adjustments are made to rectify errors and omissions committed in the past by passing adjustment entry
for each adjustment or a single adjustment entry through the Capital/Current Accounts of partners for the net
amount of the errors and omissions, as is required by the question.
Guarantee of Minimum Profit to a Partner
Sometimes, a partner may be guaranteed a minimum amount of his share in profits. Such a guarantee may
be provided by one or some or all of the partners in an existing profit-sharing ratio or in some other agreed
ratio. If in any year, the actual share of profit is less than the guaranteed amount, the deficiency is borne by the
guaranteeing partners in their agreed ratio.