Principles of Accounting: Partnerships: Capital and Current Accounts

• Like a normal business partnerships are formed when their owners (partners) inject capital into the business
• While the principles of recording capital are the same as those of a Sole Trader business
• There are certain differences that need to be borne in mind
• One of these is the fact that the capital contribution of each member has to be clearly shown
• One way to do this is to create a capital account for each partner and showing the appropriate entries therein
• However another more common technique is to create a single capital account with columns showing the entries pertaining to each partner
• Both methods are identical in nature and you can settle on either
• Where space allows the column method is used in our examples and solutions
• Please note this is just a way of displaying the accounts it does not affect entries
• For example: K Rombe and B Choto formed a partnership by contributing $25 000 and $50 000 respectively
• This can be shown as below

Capital Accounts shown seperately

Capital Accounts shown in columnar form

Fixed Capital and Fluctuating Capital Accounts

• Remember that the amount of capital (Equity) within the business is:
  • Increased by profits every year or decreased by net losses each year
  • Affected by further injections or withdrawals of capital
  • Reduced by drawings
• To show these changes there are two options:
  1. A fixed capital account and current accounts to record fluctuations throughout the duration of the partnership
  2. Fluctuating capital accounts

1 Fixed capital accounts plus current accounts

• The capital account of each partner only shows the capital contributions of the relevant partner for the duration of the partnership and nothing else
• The profits, interest on capital and salaries to which partner a partner is entitled are credited to that partner’s current account
• Drawings and interest on drawings are debited this same current account
• The balance at the end of each financial period represents the amount of drawn/undrawn profits
• A credit balance will shows the amount of undrawn profits while
• A debit balance shows the drawings in excess of profits to which a partner was entitled i.e. a partner took more in drawings that they were entitled
• Again the current account partner can be shown desperately as with capital accounts shown above or
• As we prefer, the can be shown as columns in one Current Accounts Account

• You are required to draw guidance on how to compute the figures from the question and your knowledge of partnerships
• We have created a set of guidelines shown here

2 Fluctuating capital accounts

• Here all entries that would normally be shown in the current account are recorded in the capital accounts of each partner and no current account are mantained
• For this reason the capital accounts balances will change each financial period
• Hence the name of the method fluctuating (changing) account balances
• Each partner’s share of profit and drawings and interest on drawings are debited to the relevant partner’s capital account

NB:

• The above example is different from the one showing current accounts. The two are just illustrations

Always prefer the Fixed Account and Current Account balances

• You are to always use current accounts as shown in method one
• Never ever use the fluctuating capital balance method unless the question explicitly asks you to do so
• We will however contend you will never be asked to do this
• As a result always use method 1, indeed in these notes we will only ever use method 1

To access more topics go to the Principles of Accounts Notes.