CONTENT :

1. Detail concept of capital account.
2. Fixed capital and Fluctuating capital Account Methods.
3. Know how to maintain capital accounts of partners.

WHAT IS CAPITAL ACCOUNT ?

DEFINITION : 

"Capital account can be regarded as one of the primary components of the balance of payments of a nation. It gives a summary of the capital expenditure and income for a country."

Detail Description of Capital Account  :

The capital expenditure and income is tracked by way of funds in the form of investments and loans flowing in and out of an economy. This account comprises foreign direct investments, portfolio investments, etc. It gives a summary of the net flow of both private and public investment into an economy.
A capital account deficit shows that more money is flowing out of the economy along with increase in its ownership of foreign assets and vice-versa in case of a surplus. The balance of payments contains the current account (which provides a summary of the trade of goods and services) in addition to the capital account which records all capital transactions.

WHAT ARE THE METHODS OF CAPITAL ACCOUNT ?

METHODS OF CAPITAL ACCOUNTS :

An amount contributed by a partners in cash or in kind in the business is called capital. Amount contributed initially by the partners may not remain same at the end of the each year due to serval reasons, such as, additional contribution, interest on capital, interest on drawings, salary or commission to partners, share of profits or losses of the business etc.

1) FIXED CAPITAL METHOD -

Under this method, the initial capital contributed by a partner remains constant at the end of the financial year. It does not change in particular financial year, additional capital should be transferred to current account.
Under this system, all transactions such as interest on capital, drawing, salary or commission to partners, share of profit or loss etc. will be recorded to a seprate account which is called as "Partners Current Account". Hence, in this method two accounts are opened as follows :
a) PARTNER'S CAPITAL ACCOUNT &
b) PARTNER'S CURRENT ACCOUNT.
When partners adopt fixed capital method, Partners Current Accounts are opened.
It is therefore obvious that whenever the Partners Current Account  appear in the books,  Fixed Capital Method  is followed by the firm in accounting.

Appears as under :


2) FLUCTUATING CAPITAL METHOD :

Under this method, along with capital brought in by the partners all the adjustments relating to the partners, such as interest on capital, drawing, salary and commission to partners, share of profit or loss etc. are recorded to partners capital account only, hence partners current account need not been opened, In this method, amount of partners capital, because of the above mentioned adjustments, changes from time to time, hence this method is called as fluctuating capital method.
the credit balance shown by partners capital account is recorded on the liability side of the balancesheet. However, sometime this account may show a debit balance, which is to be recorded to the asset side of the balancesheet'

Appears as under :



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