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What is fluctuating capital method and fixed capital method in Partnership?

 

In partnership two accounts are prepared for partners’ capital under the method of fluctuating capital method and fixed capital method.

Accounts which are prepared under this methods are ledger account. In fluctuating capital method only capital account is prepared which includes all those transactions which helps to increase or decrease the capital of  the partners. Under this method the capitals of partners are fluctuating and it never remains steady.

Format of capital accounts:

Particulars

Amount (X)

Amount (Y)

Particulars

Amount (X)

Amount (Y)

By Cash / Bank a/c

(withdrawn capital)

 

 

To Opening balance a/c

 

 

By Drawing a/c (out of profit)

 

 

To Cash/ Bank A/c

 

 

By Interest on drawing capital a/c

 

 

To  Commission a/c

 

 

By Profit & Loss a/c (loss)

 

 

To Salaries a/c

 

 

By Closing balance a/c

 

 

To Interest on capital a/c

 

 

 

 

 

To Profit & loss Appropriation a/c (share in profit)

 

 

 

Under 2nd method that is fixed capital method two accounts are prepared. It has to be mention in the partnership deed before apply it and which is not necessary in fluctuating capital method.

The first account which has to prepare is capital account. In which capitals related transactions are recorded like permanent withdrawal of cash, additional capital added, etc.

Format of capital accounts:

Particulars

Amount (X)

Amount (Y)

Particulars

Amount (X)

Amount (Y)

By Cash/ Bank a/c

(withdrawn cash)

 

 

To Opening balance a/c

 

 

By Closing balance a/c

 

 

To Cash/Bank A/c

(Additional capital introduced)

 

 


The second account is current account which is prepare to record all the transactions related to increase or decrease the partners capital except the capitals amount and further capital added by partners.

Format of current accounts:

Particulars

Amount (X)

Amount (Y)

Particulars

Amount (X)

Amount (Y)

By opening balance a/c

(Debit balance)

 

 

To opening balance a/c

(credit balance)

 

 

By Interest on drawing a/c

 

 

 

To  Interest on capital a/c

 

 

By Drawing a/c (out of profit)

 

 

To Salaries,Commission a/c

 

 

By Profit & Loss a/c (loss)

 

 

To Profit & loss Appropriation a/c (Share in profit)

 

 

By Closing balance a/c (credit balance)

 

 

To Closing balance a/c

(debit balance)

 

 

 

With the help of example find out how to use fluctuating capital method and fixed capital method to prepare account?

Example: ABC has 3 partners whose share on profit is 4:3:3. A’s drawing a cash of Rs. 20,000 cash and B’s drawing cash of Rs. 16,000. C’s invested Rs. 50,000 further at the end of the period. Salary of these 3 partners is as follows Rs. 40,000, Rs. 35,000 and Rs. 48,000. Partner A has further added Rs. 10,000. Interest on drawing cash is Rs. 600 and Rs.550 respectively. Total profit available to distribute among partners are Rs. 40,000. Opening (credit) balance of capital a/c is Rs. 1, 00,000, Rs. 1, 50,000 and Rs. 2, 10,000 respectively partners A, B and C. Opening (credit) balance of current a/c is Rs. 6000, Rs. 4900 and Rs.7000.

Solution:

Fluctuating Capital method:

Particulars

A

B

C

Particulars

A

B

C

By interest on drawing a/c

600

550

-

To opening balance a/c

1,00,000

1,50,000

2,10,000

By drawing a/c

20,000

16,000

-

To salary a/c

40,000

35,000

48,000

By closing balance a/c

1,45,400

1,80,450

320,000

To profit & loss appropriation a/c

16,000

12,000

12,000

 

 

 

 

To cash a/c

10,000

-

50,000

 

1,66,000

1,97,000

3,20,000

 

1,66,000

1,97,000

3,20,000

 

Profit distributed among partners in 4:3:3

A = 40,000 /10 = 4000 *4 = 16000, 4000*3 = 12,000, 4000*3 = 12,000

Fixed capital method:

Format of capital accounts:

Particulars

A

B

C

Particulars

A

B

C

By closing balance a/c

1,66,000

1,97,000

3,20,000

To opening balance a/c

1,00,000

1,50,000

2,10,000

 

 

 

 

To cash a/c

10,000

-

50,000

 

1,66,000

1,97,000

3,20,000

 

1,10,000

1,50,000

2,60,000


Format of current accounts:

Particulars

A

B

C

Particulars

A

B

C

By interest on drawing a/c

600

550

-

To opening balance a/c

6,000

4,900

7,000

By drawing a/c

20,000

16,000

-

To salary a/c

40,000

35,000

48,000

By closing balance a/c

41,400

35,350

 

To profit & loss appropriation a/c

16,000

12,000

12,000

 

62,000

51,900

67,000

 

62,000

51,900

67,000

 

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