1. Introduction
In a partnership firm, the capital contributed by partners is recorded in their Capital Accounts. The treatment of items such as interest on capital, salary, drawings, interest on drawings and share of profit/loss can be done in TWO ways depending on the partnership deed:
- Fixed Capital Method – two accounts are maintained for each partner: Capital Account and Current Account.
- Fluctuating Capital Method – only ONE Capital Account is maintained for each partner; all adjustments are recorded in this single account.
2. Fixed Capital Method
Capital Account – records only two items:
1. Original capital introduced by the partner.
2. Additional capital introduced or capital permanently withdrawn.
The balance of the Capital Account therefore remains FIXED unless fresh capital is brought in or withdrawn permanently. It always shows a credit balance.
Current Account – records all routine adjustments:
- Credit side: Interest on capital, Salary/commission to partner, Share of profit, Opening credit balance.
- Debit side: Drawings, Interest on drawings, Share of loss, Opening debit balance.
The Current Account may show either a debit or a credit balance.
3. Fluctuating Capital Method
Only ONE Capital Account is prepared for each partner. All items — capital, drawings, interest on capital, interest on drawings, salary, commission, share of profit/loss — are recorded in this single account. Hence the balance keeps fluctuating year after year.
Note: If the partnership deed is silent regarding the method, the Fluctuating Capital Method is followed.
4. Distinction between Fixed and Fluctuating Capital
5. Format at a Glance
Fluctuating Capital Account (single account)
6. Solved Sums (5)
Each problem is first solved under the Fluctuating Capital Method and then under the Fixed Capital Method.
Swathika B is an MBA graduate in Finance & Business Analytics , the founder of The Commerce Lab. With a strong academic foundation in B.Com BFSI and hands-on experience in financial analysis, data analytics, and business studies, she created this platform to make Commerce and Accountancy simple, practical, and exam-ready for students across India.