CAPITAL ACCOUNTS OF PARTNERS
A partnership organisation
maintains accounts of its transactions in the same manner as a Sole Trader
ship. In partnership firms, there is a separate Capital account for each
partner. The capital contributed by each partner is credited to his capital
account. Usually every partner
contributes something in cash or in kind to provide funds for the running of a
business. The amount of contribution is mutually settled and need not
necessarily be equal.
The sum of the
contributions represents the capital of the firm. The partnership deed usually
mentions the method of maintaining capital accounts of partners. The capital
account of the partners can be maintained by two methods.
1.
Fixed Capital
Accounts
2.
Fluctuating
Capital Accounts
FIXED CAPITAL
ACCOUNTS:- Under the system of this account, the capitals
invested by the partners remain constant or unchanged unless the additional capital introduced or any amount withdrawn by
any of the partner. The main features of this system are:
·
Capitals
of partners are not allowed to change during the life time of business except
in extraordinary circumstances.
·
When
the capitals are fixed, each partner has two accounts – Capital Account and a
Current Account.
·
When
this method is adopted, all entries relating to Drawings, interest on capitals,
interest on drawings, salary to partner, share of profit or loss etc. are made
in separate account i.e. Current Account.
·
Fixed
Capital account can never show a negative balance.
Proforma of Capitals Accounts
Particulars
|
A
₹
|
B
₹
|
C
₹
|
Particulars
|
A
₹
|
B
₹
|
C
₹
|
To
Cash/Bank A/c (Permanent withdrawal of Capital)
To
Balance c/d (Closing Balance)
|
By
Balance b/d (Opening Balance)
By
Cash/Bank A/c (Additional Capital)
|
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Proforma of Current Accounts
Particulars
|
A
₹
|
B
₹
|
C
₹
|
Particulars
|
A
₹
|
B
₹
|
C
₹
|
To Balance b/d (In case of debit
opening balance)
To Drawings
To Interest on Drawings
To Profit & Loss A/c (share of
loss, in case of loss)
To Balance c/d
|
By Balance b/d (In case of credit
opening balance)
By Interest on Capital
By Salary
By Commission
By Profit & Loss Appropriation A/c
(share of profit, in case of profit)
|
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FLUCTUATING CAPITAL
ACCOUNTS:- When the capitals are not fixed, the balances
of capital accounts keep on changing time to time. Because all the entries
relating to partners are recorded in their capital accounts only. The main
features of this system are:
·
When
the capitals are fluctuating, each partner has only one account – Capital Account.
Current Accounts are not prepared in this system.
·
In
this system, all transactions relating to drawings, interest on capitals,
interest on drawings, salary to partner, share of profit or loss etc. are to be
made in the Capital Accounts itself.
·
Fluctuating
Capital Account can show a negative balance.
·
In
the absence of any instruction, the Capital Accounts should be prepared by this
method.
Proforma of Capital Accounts
|
Particulars
|
A
₹
|
B
₹
|
C
₹
|
Particulars
|
A
₹
|
B
₹
|
C
₹
|
|
To Balance b/d (In case of debit
opening balance)
To Cash/Bank A/c (Withdrawal of
Capital)
To Drawings
To Interest on Drawings
To Profit & Loss A/c (share of
loss, in case of loss)
To Balance c/d
|
|
|
|
By Balance b/d (In case of credit
opening balance)
By Cash/Bank A/c (Additional Capital)
By Interest on Capital
By Salary
By Commission
By Profit & Loss Appropriation A/c
(share of profit, in case of profit)
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST ON CAPITAL
Interest on partner’s capital is to be allowed only when it is
agreed to among the partners. It should be calculated with respect to the time,
rate of interest and the amount of capital. It is recorded on the debit side of
Profit & Loss Appropriation A/c because it is an item of expense for the
firm. It is also recorded on the credit side of Capital Accounts, as it
increases the Capitals.
Entry for Interest on Capital:-
1. On allowing interest on capital:
Interest on Capital A/c
To Partner’s Capital A/c
(Interest on capital at -----% p.a.)
2. On closure of interest on capital A/c:
Profit & Loss Appropriation A/c
To Interest on Capital A/c
Provision relating
to interest on capital:-
·
When
the partnership agreement is silent
about it then no interest will be allowed on Capital.
·
When
the partnership agreement provides for interest on capital but is silent in
treating interest as a charge or appropriation, then interest will be allowed only when there is a profit.
·
In
case of loss, no interest will be allowed on capital.
·
When
the profit before interest is equal to
or more than the amount of interest, then full interest will be allowed.
·
When
the profit before interest is less than
the interest itself, then the interest will be restricted to the amount of profit. Hence the profit will be
distributed in the ratio of interest on capital of each partner.
·
When
the partnership agreement provides for treating interest as a charge then full
interest will be allowed whether there is a profit or loss.
Example: A and B are partners in a firm. Their
Capitals on April 1, 2010 were ₹5,60,000 and ₹4,75,000 respectively. On August 1,
2010 they decided that their Capitals should be ₹5,00,000 each. The necessary
adjustments in the Capitals were made by introducing or withdrawing cash.
Interest on Capital is allowed at 6% p.a. You are required to compute interest
on Capital for the year ending March 31, 2011.
Solution: Calculation of Interest on Capitals:
A: On ₹5,60,000
for 4 months = 5,60,000 × 6/100 × 4/12
= ₹ 11,200
On ₹5,00,000 for 8 months = 5,00,000 × 6/100 × 8/12
= ₹ 20,000
Total Interest = ₹ 31,200
= ₹ 11,200
On ₹5,00,000 for 8 months = 5,00,000 × 6/100 × 8/12
= ₹ 20,000
Total Interest = ₹ 31,200
B: On ₹4,75,000
for 4 months = 4,75,000 × 6/100 × 4/12
= ₹ 9,500
On ₹5,00,000 for 8 months = 5,00,000 × 6/100 ×8/12
= ₹ 20,000
Total Interest = ₹ 29,500
= ₹ 9,500
On ₹5,00,000 for 8 months = 5,00,000 × 6/100 ×8/12
= ₹ 20,000
Total Interest = ₹ 29,500
