Topic 01: # What is Partnership?
Partnership is the relationship between two or more persons who have agreed to share the profits (includes loss also) in their profit sharing ratio and do the business which is carried on by all or any of them acting for all (mutual agency or partners are principal and agent).
Topic 02: # Partners are Separate from partnership firm from accounting viewpoint but not from legal viewpoint?
As per Separate Legal Entity concept owner/partner/proprietor has the separate entity from its business i.e owner and business both are different from accounting point of view but from legal point of view all partners are personally liable for all the liabilities of the business. It can be explained with an example.
Example: Aarambh and Ginni are partners sharing profit and losses equally. They have capital of Rs 1,10,000 and 2,00,000 respectively. During the year Aarambh purchased a watch for his wife for Rs 10,000 out of business fund and Ginni purchased a dress for her mother for Rs 20,000 from his personal fund i.e not from partnership business fund. At the end of the year business incurred a loss of Rs 4,00,000. Explain the concept of Partners are Separate from partnership firm from accounting viewpoint but not from legal viewpoint.
Solution: There are two aspects in this example which can be explained as under
- Partners are Separate from partnership firm from accounting point of view: In this case Aarambh purchased a watch for his wife for Rs 10,000 will be recorded in business books of accounts because the business fund is used by Aarambh and it is called Drawing for Arrambh but in case of Ginni it will not be recorded in the partnership firm because Ginni purchased a dress for her mother from self fund and not from business fund. (Reason: Business Entity Concept).
- Partners are not Separate from partnership firm from legal point of view: As per partnership act partners are personally liable for the act of partners in partnership firm. In this case the business incurred a loss of Rs 4,00,000 but the total capital is only 3,00,000 ( Aarambh Rs 1,00,000 i.e 1,10,000-10,000 drawing and Ginni Rs 2,00,000 capital). Now in this case there is a deficiency of Rs 1,00,000 which will be born by both partners in their profit sharing ratio (PSR) equally i.e Rs. 50,000 by Aarambh and Rs 50,000 by Ginni. In this case both partners are personally liable and they have to bring Rs 50,000 each from their personal assets/fund.
Topic 03: # What are the features or characteristics of Partnership ?
Meaning of Partnership: Partnership is the relationship between two or more persons1 who have agreed2 to share the profits (includes loss also) in their profit sharing ratio3 and do the business4 which is carried on by all or any of them acting for all5 (mutual agency or partners are principal and agent).
Features or Characteristics of Partnership
1. Two or more persons 2) An Agreement 3) Business 4) Profit Sharing Ratio
5) Carried on by all or any of them acting for all (Mutual Agency)
Detail Explanation:
1. Two or more persons
There must be at least two persons to form a partnership and all such persons must be competent to perform the contract.
# Minimum and maximum limit of partners in partnership firm?
As per Partnership Act 1932 the minimum limit of partners are At least two persons. Whereas the maximum limit of partners is not prescribed under Partnership Act.
However, the Companies Act 2013 (section 464), empowers the Central Government to prescribe number of partnership in a firm subject to maximum of 100 partners.
Also, the Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of Companies (Miscellaneous) Rules, 2014.
As a result, a partnership firm can’t have more than 50 partners if Section 464 or Rule 10 is silent in questions.
# Must be competent to contract? Every person is competent except
i) Persons of unsound mind: A person of unsound mind is someone who lacks the mental capacity to understand and form a rational judgment about a contract.
An unsound mind is a state of mental infirmity or disease that makes it difficult for someone to understand things or manage their own affairs.
Examples of people who may be considered to be of unsound mind include:
a) Lunatic: Someone who experiences fits of madness (दौरा) but is sane between episodes
b) Idiot: Someone who has a non-sane memory from birth and is mentally deficient or disturbed
c) Person with a mental disorder: Someone who has a mental illness, psychopathic disorder
d) Intoxicated person: Someone who is under the influence of alcohol and is unable to make rational decisions
ii) Persons disqualified by law: Persons disqualified by law” refers to people who are legally prohibited from entering into contracts. This means that contracts made with these people are not legally enforceable.
Some examples of people who are disqualified by law include:
a) Alien enemies: People who are not citizens of India but are from a country that is at war or in conflict with India
b) Convicts: People who have been convicted of a serious offence.
c) Insolvents: People who have been declared bankrupt or against whom insolvency proceedings have been filed in court
# Note: Minor as a Partner
i) A minor will not be competent to contract, but can be a partner in the partnership firm only for profits and not for losses.
ii) A minor partner should accept or refuse the partnership in the firm within 6 months on becoming major i.e attaining 18 years of age
iii) If partner decided to continue then he will be liable for all the actions since he became partner.
2) An Agreement
i) Partnership comes into existence either by an oral agreement or written agreement.
ii) The written agreement among the partners is known as Partnership Deed.
iii) It is the basis of relationship among partners, which may be for a Particular Venture, for a particular period or at will.
iv) It resolved all the disputes arises if any
# Partnership Deed: A legally binding document (Partnership Deed) that outlines T&C of partnership which are detailed as under:
- Description of Partners
- Description of the firm
- Principal place of business
- Nature of business
- Date of commencement of partnership
- Capital Contribution (Amount / Fixed / Fluctuating)
- Interest on Capital
- Interest on Drawing
- Profit Sharing Ratio
- Interest on Loan
- Remuneration to Partners
- Rent to Partners
- Valuation of Goodwill (Methods of valuation at the time of reconstitution of Partnership firm)
- Valuation of Assets at the time of Reconstitution of firm
- Settlement of Accounts at the time of Retirement/death/dissolution
- Accounting Period
- Rights and duties of Partners
- Duration of Partnership (Particular Venture, Particular period or at Will)
- Bank of Operations jointly or individually
- Settlement of disputes and its resolution
- Exit procedures/Dissolution of Partnership Firm
# What is the impact in case of Absence of Partnership Deed?
Rule1. Interest on Loan (Given by Partners to Firm) will attract interest @6% P.A
Rule2. Profit sharing ratio will be Equal
Rule3. Nothing will be given to partners in the form of Interest on Capital, Salary, Commission etc and nothing will be charged from partners in the form of Interest on Drawing, Interest on loan etc.
Rule4. New partner cannot be admitted unless all the partners agree to it.
3) Business
A business is an economic activity or place that involves the production, purchase, sale, or exchange of goods and services to make a profit and satisfy customer needs.
Under partnership a business which is owned and operated by two or more persons through a legal agreement/written agreement.
4) Profit Sharing Ratio
It must be mentioned in the Partnership Deed that what is the Profit Sharing Ratio of all partners but if it is not mentioned in partnership deed or in case of absence of partnership deed the profits shall be distributed among all partners in equal ratio.
5) Carried on by all or any of them acting for all (Mutual Agency)
This means that each partner is bound by the actions of the other partners, and is also liable for the firm’s actions while they are a partner.
Partnership Deed/Written Agreement Crux:
| Items | is partnership deed? (YES) | is partnership deed ? (NO) |
| Interest on Partners Loan (Loan given by Partner to Firm) | As per Partnership deed | 6% p.a. |
| Profit Sharing Ratio | As per Partnership deed | Equally among all partners |
| Interest on Capital | As per Partnership deed | Nil |
| Interest on Drawing | As per Partnership deed | Nil |
| Salary to partner | As per Partnership deed | Nil |
| Commission to Partner | As per Partnership deed | Nil |
| Any other payment to partner | As per Partnership deed | Nil |
Example 01: (Provisions of the Indian Partnership Act, 1932, if Partnership Deed is not there).
Aarambh, Ginni and Amaira are partners in a firm and they do not have a Partnership Deed, also they have so many disagreement. So as an accountant you have to resolve the disputes.
a) Aarambh had invested more capital than other partners and asks for interest on capital @15% p.a. But Ginni and Amaira do not agree with him.
Ans: As per partnership deed if there is no deed or question is silent about deed, then nothing will be given to any partner in the form of Interest on Capital (IOC). So in this case Aarambh will get nothing as IOC.
b) Ginni gives more time to manage business day to day affairs and Ginni demands a salary of₹ 5,000 p.m. But Aarambh and Amaira do not agree with him.
Ans: As per partnership deed if there is no deed or question is silent about deed, then nothing will be given to any partner in the form of Salary. So in this case Ginni will get nothing as Salary.
c) Amaira demands interest on the loan (Given by her to Partnership firm) of ₹50,000 and demands interest on loan @ 12% p.a.
Ans: As per partnership deed if there is no deed or question is silent about deed, then max rate of interest on loan (IOL) will be 6% p.a. In this case Amaira will not get IOL @12% p.a but can get @6% p.a
d) Aarambh withdrew ₹ 10,000 from the firm for his personal use. Ginni and Amaira demanded that interest on drawings be charged from him @ 10% p.a.
Ans: As per partnership deed if there is no deed or question is silent about deed, then nothing can be charged from partners either interest on drawing (IOD) or interest on loan. In this case nothing will be charged from Aarambh as IOD.
e) Profit of Rs 50,000 was distributed in partners’ capital ratio but Aarambh demands profits to be shared equally.
Ans: As per partnership deed if there is no deed or question is silent about deed, then profits are shared in equal proportion. So in this case Aarambh is correct and profit will be shared among all partners in equal ratio.
(f) Aarambh wants to introduce his son Chahit as partner. Ginni objects to his proposal.
Ans: As per partnership deed if there is no deed or question is silent about deed, then no new partner can be admitted in partnership firm until the consent of all partners. So in this case Aaarambh can not introduce his son Chahit as a partner in partnership firm.
Topic 04: # What are the rights and duties of a partner?
# Rights of a partner
-
- Right to participate in the business
- Right to Access Books of Accounts
- Right to express opinion
- Right to share profits
- Right to Inspect/examine Records and Books of accounts
- Right to Retain Firm Property after dissolution of firm
- A partner has the right to retire from the firm after serving a notice of retirement.
- Right to Interest on Advances/loans given by partner to firm as per deed, otherwise @6% p.a.
- Partners has the right to not allow any new partner admission.
- Right to be Indemnified against any losses or liabilities incurred in the ordinary course of business
# Duties of a partner?
-
- Duties to share profits in agreed ratio
- If a partner carries on a business in competition with the firm without the consent of other partners and earns profit from it, then the profit earned from such business shall be paid to the firm. However, in case of losses incurred shall be borne by him alone.
- If a partner earns profit for himself from any transaction of the firm or from the use of firm’s property or business connection, the profit so earned shall be paid to the firm
- Duty to Disclose vested interest (conflict of interest
- Partners are liable to compensate the firm for any losses caused by their fraudulent actions.
Topic 05: # Charge against profit (CAP) vs Appropriation of profit (AOP) and Treatment of Interest on Loan to Partner, Interest on Loan by partner, Rent on partner’s personal property & Manager’s Commission
Charge against Profit vs Appropriation of Profit
Charge against Profit means that it is an expense for the firm and is paid whether the firm earns profit or incurs loss. E.g. Interest on Loan by Partner, Rent Payable to a partner and Manager’s Commission, Employees salary, etc
Appropriation of profit means distribution/allocation of total net profit (Net Profit as per P&L and interest on partners Drawings) among partners in the form of salary, interest on capital, commission and transfer to reserves.
Difference between Charge against Profit (CAP) and Appropriation of Profit (AOP)
| Basis | Charge against Profit | Appropriation of Profit |
| Timing | It is deducted from Gross Profit to calculate net profit. | It is allocated after calculating net profit among partners. |
| Nature | It is compulsory expense which must be deducted from revenue to determine net profit or net loss for the year. | It means distribution of net profit among partners in the form of salary, interest on capital, commission etc |
| Impact on Net Profit | Charges against profit reduced the net profit amount. | Appropriation of profit do not directly affect the amount of net profit. |
| Recording | It is transferred to the debit side of Profit & Loss Account. | It is transferred to the debit side of Profit & Loss Appropriation Account. |
| Priority | It is allowed before Appropriation of Profit. | It is appropriated after accounting of all charges. |
| Examples | Rent paid to a partner, interest on loan by partner, etc | Salary to partners, interest on capital, transfer of profit to General Reserve, etc. |
Charge Against Profit Covers
- Interest on Loan by Partner to Firm
- Interest on Loan by Partner to the firm: if a partner gives loan or advance to the partnership firm, in such case interest will be paid to the partner at an agreed rate as per Partnership Deed or otherwise (in case of oral agreement), but in the absence of an agreement, interest on loan @ 6% p.a. will be given.
- Interest on loan by partner is a charge against profit. It means that interest will be allowed/paid to the partner on the loan amount whether the firm earns profit or incurs loss (compulsory expense).
Accounting Treatment:
- On allowing interest on Loan by Partner
Interest on Loan by Partner A/c…………..Dr
To Loan by Partner A/c
Or
Interest on Loan by Partner A/c…………..Dr
To Interest Outstanding A/c
2. On payment of interest
Loan by Partner/ Interest Outstanding A/c…………Dr
To Cash/Bank A/c
3. To close the Interest on Loan by Partner A/c
Profit & Loss A/c……………………………………….Dr
To Interest on Loan by Partner A/c
- Interest on Loan by Firm to Partner
-
- Interest on Loan by the firm to a partner is charged @ agreed rate as per partnership deed but if no partnership deed then nothing will be charged.
- In case if it is agreed to charge interest on loan to a partner, amount of interest charged is transferred in the credit of Profit & Loss Account.
Accounting Treatment:
(i) For Charging Interest on Loan to Partner:
Partner’s Capital/Current A/c………………………………..Dr
To Interest on Loan to Partner A/c (Given)
(ii) If Interest on Loan to Partner is received:
Cash/Bank A/c…………………………………..Dr
To Partner’s Capital/Current A/c
(iii) For Transfer of Interest on Loan to Partner A/c to Profit & Loss A/c:
Interest on Loan to Partner A/c…………..Dr
To Profit & Loss A/c
3. Rent Paid or Payable to Partner
Rent is paid or payable to partner in respect of partner’s personal property used by partnership firm. If partnership firm would take the property on rent from owner (other than partner), then in such case rent was definitely to be paid to the owner. So, rent paid to the partner is charge against property (CAP) because it is a compulsory expense to run the business and will be shown in the debit side of Profit & Loss A/c.
Accounting Treatment of Rent on Partner’s Personal Property:
i) When rent is paid
Rent A/c……………..Dr
To Cash/Bank A/c
ii) When rent is due/payable
Rent A/c…………….Dr
To Rent Payable A/c
iii) When Rent A/c is transferred to Profit & Loss A/c
Profit & Loss A/c……………….Dr
To Rent A/c
3. Manager’s Commission
Manager’s commission is a mandatory expenses to run the business and it must be paid by the partnership firm whether firm earns profit or incurs loss. So it is charge against profit (CAP) and will be shown in the debit side of P&L A/c.
Accounting Treatment of Manager’s Commission
i) When Manager Commission is paid
Manager Commission A/c……………..Dr
To Cash/Bank A/c
ii) When Manager Commission is due/payable
Manager Commission A/c…………….Dr
To Manager Commission Payable/Outstanding Manager’s Commission A/c
iii) When Manager Commission A/c is transferred to Profit & Loss A/c
Profit & Loss A/c……………….Dr
To Manager Commission A/c
CRAM: Any appropriation item like Salary to partner, Interest on Capital to partner etc can be treated as Charge Against Profit if it is given in question, then it will become compulsory expenses and will be debited in P&L A/c and not in P&L Appropriation A/c.
Topic 06: # Format of Profit & Loss Appropriation A/c # Transfer to Reserve # Journal Entries of P&L Appropriation A/c # Difference between P&L and P&L Appropriation A/c
# Profit & Loss Appropriation A/c
It is prepared by the partnership firm to distribute the profit or loss earned by the partnership firm including interest on drawing among all partners in the form of Interest on capital, Salary, Commission to partners etc.
In other words it can be concluded that Profit & Loss Appropriation A/c is the extension of Profit & Loss A/c. So the profit earned during the year by partners (from P&L A/c) are distributed among partners (by preparing P&L Appropriation A/c) as per partnership deed.
Note: Under Fixed Capital Account Method Use “Current A/c” and under Fluctuating Capital Account Method Use “Capital A/c”. Also use the same for JE’s.
Format of Profit & Loss Appropriation A/c
| Particulars | ₹ | Particular | ₹ |
| To Profit & Loss A/c (Net Loss transferred from P&L A/c) | XXX | By Profit & Loss A/c (Net profit transferred from P&L A/c) | XXX |
| To Interest on Capital | By Interest on drawing | ||
| A’s Capital A/c | XXX | A’s Capital A/c | XXX |
| B’s Capital A/c | XXX | B’s Capital A/c | XXX |
| To Partners Salary | XXX | ||
| To Partners Commission | XXX | ||
| To General Reserve | XXX | ||
| To Profit transferred to Partners Capital/Current A/c | To Loss transferred to Partners Capital/Current A/c | ||
| A’s Capital/Current A/c | XXX | A’s Capital/Current A/c | XXX |
| B’s Capital/Current A/c | XXX | B’s Capital/Current A/c | XXX |
| Total | XXXX | Total | XXXX |
# Transfer to Reserve
Amount is set aside for the future contingencies is known as Reserve. In partnership the Reserve is created as % of Net Profit or Divisible Profit or Net Divisible Profit which is Debited to Profit & Loss Appropriation A/c. It may be discussed and calculated as under in following cases.
Case 1: Amount of Reserve is calculated as % of Net Profit:
Reserve = Net Profit x Rate of Reserve /100
Note: Here Net profit means the Profit calculated as per P&L A/c.
Case 2: Amount of Reserve is calculated as % of Divisible Profit:
Reserve = Divisible Profit x Rate of Reserve /100
Note: Here Divisible Profit means :
| Computation of Divisible Profit | |
| Profit As per Profit & Loss A/c. | XXXX |
| Add: Interest on Drawing | XXXX |
| Less: Interest on Capital | XXXX |
| Less: Salary to partners | XXXX |
| Less: Commission to partners | XXXX |
| Divisible Profit | XXXX |
Case 3:
Amount of Reserve is calculated as % of Net Divisible Profit:
Reserve = Divisible Profit x Rate of Reserve /100+Rate of Reserve
Note: Here Divisible Profit means :
| Computation of Divisible Profit | |
| Profit As per Profit & Loss A/c. | XXXX |
| Add: Interest on Drawing | XXXX |
| Less: Interest on Capital | XXXX |
| Less: Salary to partners | XXXX |
| Less: Commission to partners | XXXX |
| Divisible Profit | XXXX |
# Journal Entries of Profit & Loss Appropriation A/c
|
Journal Entries of Profit & Loss Appropriation A/c |
| Case 1: Transfer of profit from Profit & Loss Account to Profit & Loss Appropriation Account |
|
Profit & Loss A/c…….Dr To Profit & Loss Appropriation A/c |
Case 2: Transfer of loss from Profit & Loss Account to Profit & Loss Appropriation Account
Profit & Loss Appropriation A/c…….Dr
To Profit & Loss A/c
Case 3: For Partners Salaries/Remuneration/Commission
Partners’ Salaries/Remuneration/Commission A/c…………………Dr
To Partners’ Capital/Current A/c
Profit & Loss Appropriation A/c……………………………………………….Dr
To Partners’ Salaries/Remuneration/Commissions A/cs
Case 4: For Allowing Interest on Capitals (Adjusting Entry)
Partners’ Interest on Capital A/c…………………Dr
To Partners’ Capital/Current A/c
Profit & Loss Appropriation A/c……………………………………………….Dr
To Partners’ Interest on Capital A/cs
Case 5: For Charging Interest on Drawings (Adjusting Entry)
Partners’ Capital/Current A/c…………………Dr
To Interest on Drawing A/c
Interest on Drawing A/c………………………….Dr
To Profit & Loss Appropriation A/c
Case 6: For Transfer to Reserve
Profit & Loss Appropriation A/c………………….Dr
To General Reserve A/c
Case 7: For Transfer of Credit Balance of Profit & Loss Appropriation Account to Partners Capital/Current A/c
Profit & Loss Appropriation A/c……………….Dr
To Partners’ Capital/Current A/c
Case 8: For Transfer of Debit Balance of Profit & Loss Appropriation Account to Partners Capital/Current A/c
Partners’ Capital/Current A/c……………….Dr
To Profit & Loss Appropriation A/c
# Difference between Profit & Loss A/c and Profit & Loss Appropriation A/c
| Basis | Profit & Loss A/c | Profit & Loss Appropriation A/c |
| When Prepared | It is prepared after Trading Account. It starts with Gross Profit (in the credit side) or Gross Loss (in the debit side) as per the Trading Account for the year. | It is prepared after Profit & Loss Account. It starts with Net Profit (in the credit side) or Net Loss (in the debit side) as per the Profit & Loss Account for the year. |
| Objective | It is prepared to determine net profit earned or net loss incurred during the accounting year. | It is prepared to present the appropriation of net profit, i.e., distribution of Net Profit or Net Loss for the year among the partners. |
| Nature of Items | It is debited with the expenses (charge against profit- Interest on partners Loan and Rent of partners property) and credited with the income, to determine net profit or loss for the accounting period. | It is debited for appropriation of profit such as interest on capital salary/remuneration/commission to partners and transfer to reserve, etc. It is credited with interest on drawings, etc. |
| Partnership Deed or Agreement | Preparation of this account is not guided by the Partnership Deed or Agreement. | Preparation of this account is guided by the Partnership Deed or Agreement. |
| Matching Concept | While preparing this account, Matching Principle (ie, expense is matched against revenue) is followed. | While preparing this account, Matching Principle is not followed being not applicable. |
# Cases where Appropriations of profit (as per deed) are more than available profits plus drawing
In this case following two situations may arise
- If appropriations of profit (as per deed) are more than available profits plus drawing then the available profits will be distributed in the ratio of Appropriations
- If appropriations of profit (as per deed) are more than available profits plus drawing then the available profits will be distributed in the ratio of Capital as information given in Question
TOPIC 07: # Partners Capital A/c can be shown in following two methods
1. Fixed Capital Account Method: Under this method two accounts are maintained
-
-
- Partners’ Fixed Capital Account – In this method the Capital Account Balance remains unchanged for every year until Additional Capital is introduced by Partners’ or Special Drawing (Out of Capital) is done by Partners’. Additional capital amount is credited and Special Drawing is Debited in Partners; Capital Account.
- Partners’ Current Account: Current Account is maintained to record transactions other than transactions of Fixed Capital Account which are Credited with Current Account Credit Balance, Interest on Partners Loan, Rent on Partners Property, Interest on Partners Capital, Salary to Partners, Commission to Partners, Profit share to the partners etc and Debited with Current Account Dr Balance, General Drawing (out of Profit), Interest on Drawing, Loss during the year etc. and Closing Balance of Current Account either Dr or Cr.
- Format of Partners Capital and Current Account is as under
-
| Partners Capital A/c Format | |||||
| Dr | Cr | ||||
| Particular | Amount | Amount | Particular | Amount | Amount |
| To Bank (Special Drawing) | XXX | XXX | By Balance B/D | XXX | XXX |
| (Opening Balance of Capital) | |||||
| By Bank (Additional Capital) | XXX | XXX | |||
| Total | XXX | XXX | Total | XXX | XXX |
| Partners Current A/c Format | |||||
| Dr | Cr | ||||
| Particular | Amount | Amount | Particular | Amount | Amount |
| To Balance B/D (Dr Balance) | XXX | XXX | By Balance B/D (Cr Balance) | XXX | XXX |
| To Drawing (Out of Profit) | XXX | XXX | (Opening Balance of Current A/c) | ||
| To Interest on Drawing | XXX | XXX | By Interest on Loan | XXX | XXX |
| To Net Loss Transferred to | XXX | XXX | By Rent on property | XXX | XXX |
| By Interest on Capital | XXX | XXX | |||
| By Salary to partners | XXX | XXX | |||
| By Commission to partners | XXX | XXX | |||
| By General reserve | XXX | XXX | |||
| By Net Profit transferred to | XXX | XXX | |||
| To Balance C/D | By Balance C/D | XXX | XXX | ||
| Total | XXX | XXX | Total | XXX | XXX |
2. Fluctuating Capital Account Method:
-
-
- Partners’ Capital Account – In this method the Capital Account Balance changes continuously every year. Capital Account is maintained to record all the transactions which are Credited i.e Opening Capital Balance, Interest on Partners Loan, Rent on Partners Property, Interest on Partners Capital, Salary to Partners, Commission to Partners, Profit share to the partners etc and Debited with Capital Account Dr Balance, Drawing (out of Profit & out of Capital), Interest on Drawing, Loss during the year etc. and Closing Balance of Capital Account may be Dr or Cr.
- Format of Partners Capital is as under
-
| Partners Capital A/c Format (Under Fluctuating Method) | |||||
| Dr | Cr | ||||
| Particular | Amount | Amount | Particular | Amount | Amount |
| To Balance B/D (Dr Balance) | XXX | XXX | By Balance B/D (Cr Balance) | XXX | XXX |
| (Opening Balance of Capital A/c) | (Opening Balance of Capital A/c) | ||||
| To Drawing (Out of Profit) | XXX | XXX | By Interest on Loan | XXX | XXX |
| To Drawing (Out of Capital) | XXX | XXX | By Rent on property | XXX | XXX |
| To Interest on Drawing | XXX | XXX | By Interest on Capital | XXX | XXX |
| To Net Loss Transferred to | XXX | XXX | By Salary to partners | XXX | XXX |
| By Commission to partners | XXX | XXX | |||
| By General reserve | XXX | XXX | |||
| By Net Profit transferred to | XXX | XXX | |||
| To Balance C/D | By Balance C/D | XXX | XXX | ||
| Total | XXX | XXX | Total | XXX | XXX |
# Difference between Fixed Capital Account and Fluctuating Capital Account
| Basis | Fixed Capital Account | Fluctuating Capital Account |
| 1. No. of Accounts Maintained | Two accounts are prepared for each partner, i.e., Fixed Capital Account and Current Account. | Only one account (i.e., Capital Account) is prepared for each partner. |
| 2. Frequency of Change | Balance in Fixed Capital Account does not change except when further capital is introduced or capital is withdrawn (Drawing out of Capital) | Balance changes with every transaction related to partner. |
| 3. Transferring the Transactions | Transactions of Additional Capital and Special Drawing are credited or debited in Capital Accounts, and transactions for drawings out of profit, interest on drawings, interest on capital, salary, commission, rent on partners property, interest on loan, share of profit or loss are transferred to Current Account. | All transactions related to partners are transferred to partners capital account only. E,g capital, drawings, interest on drawings, interest on capital, salary, commission, rent on partners property, interest on loan, share of profit or loss are transferred to Capital Account. |
| 4. Balance | Capital Account has only credit balance. | Fluctuating Capital Account may have credit or debit balance. |
# Difference between Capital Account and Current Account
| Basis | Capital Account | Current Account |
| 1. Need | Capital Account is prepared in all the situations. | Current Account is prepared when Fixed Capital Accounts method is used. |
| 2. Balance of Account | whether following Fixed Capital Accounts Method or Fluctuating Capital Accounts Method, Capital Account will have a credit balance when Fixed Capital Accounts Method is followed and Fluctuating Capital Accounts Method, it may have either credit or debit balance. | Balance of a Current Account may have a credit or debit balance. |
| 3. Nature | In case of fixed capital, Capital Account balance generally remains unchanged from year to year. It changes when further capital is introduced or capital is withdrawn by a partner. | Balance of Current Account does not change when capital is introduced or withdrawn by a partner. |
| 4. Transactions | Capital Account records the amount invested by a partner or withdrawn by a partners in the firm. | Current Account records the transactions such as drawings, interest on capital, interest on drawings, salary, commission, profit or loss, etc. |