Fixed and fluctuating capital

The essentials

A partner's capital can be maintained in two ways. Under the fixed capital method, each partner has two accounts. The Capital Account shows only the original capital, plus any additional capital introduced or capital permanently withdrawn, so its balance normally stays the same. All other items, such as interest on capital, salary, commission, share of profit, drawings and interest on drawings, go to a separate Current Account, whose balance changes every year and may be debit or credit.

Under the fluctuating capital method, only one account, the Capital Account, is kept for each partner. Every adjustment is recorded in it, so the balance changes (fluctuates) from year to year. If the deed is silent, capitals are taken as fluctuating.

Key points

• Fixed method: two accounts per partner; capital balance always credit.
• Current Account may show a debit balance (shown on the assets side) when drawings and losses exceed credits.
• Fluctuating method: one account; balance can, in theory, become debit.
• Credits: interest on capital, salary, commission, share of profit.
• Debits: drawings, interest on drawings, share of loss.

Exam tips

Before solving, read whether capitals are "fixed". If they are, put recurring items in the Current Account, not in the Capital Account.

Common mistakes

• Recording drawings in the Capital Account under the fixed method.
• Forgetting that additional capital introduced is shown in the Capital Account even under the fixed method.