Partners' capital accounts

Each partner has a capital account. There are two methods of keeping it.

Fixed capital method. Each partner has two accounts:

• A capital account, which holds only four items: the opening balance, fresh capital brought in, capital withdrawn, and the closing balance. So the capital stays fixed unless capital is deliberately added or withdrawn. It always shows a credit balance.
• A current account, which takes everything else. Debit side: drawings, interest on drawings, and share of loss. Credit side: salary, commission, interest on capital, and share of profit. Its balance can be credit or debit.

Fluctuating capital method. Each partner has just one account, the capital account, and all these items go into it. So its balance changes (fluctuates) every year.

Put simply: fixed means two accounts per partner; fluctuating means one. If a question does not say which method to use, use the fluctuating method.

Most of the items in these accounts (interest on capital, salary, commission, share of profit or loss, interest on drawings) are taken from the Profit and Loss Appropriation Account. Only the opening balance, closing balance, drawings and capital changes come directly from the question.