Class 12 Accountancy Fixed Capital and Fluctuating Capital Account
In Sole trader-ship business units and partnership firms, there is a choice available in the book of account to maintain the owner’s/partner’s capital accounts either on a fixed amount basis or on a fluctuating basis. Obviously, this is not so in the case of accounts of registered companies. In this article, you will get to know about the Difference between Fixed Capital and Fluctuating Capital in respect to Accountancy Class 12 Curriculum, but prior to that let’s understand the Capital Account Meaning;
CAPITAL ACCOUNT MEANING
A 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. 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.
Fixed and fluctuating capital accounts are the terms that are often used in the context of the partnership. Partners can maintain the capital accounts in two ways one is fixed capital account and other is fluctuating capital accounts;
Now, let’s understand the difference between Fixed Capital and Fluctuating Capital Accounts;
DIFFERENCE BETWEEN FIXED CAPITAL AND FLUCTUATING CAPITAL ACCOUNT
FIXED CAPITAL ACCOUNT
Fixed Capital Account means the owners/partners contribute an amount as capital at the time of commencing the business which remains in the business at the same amount. This is often the method followed in established Partnership Firms where the contribution of capital usually stands in proportion to the profit-sharing ratios among the partners. But as the name indicates, Fixed Capital Account simply means that the Capital Account is carried from one period to another at the same amount. This amount is not usually withdrawn during the lifetime of the business. In the case of partnership firms, this amount is altered only when there is a change in the profit-sharing ratio, arising due to a new agreement of partnership including during the admission of a new partner or retirement of an existing partner or death of an existing partner.
It is important to appreciate here that the accounts of the business shall have another account in the name of the sole proprietor/partners, in which the transactions like interest on capital, drawings and interest on drawings, profit/loss of the business, any salary or compensation payable to the partner, etc. That another account is usually named ‘Current’ Account with all the features of a capital account. So if Ram is the sole owner of a business unit and he contributes Rs. 50 lakhs at the time of commencement of business which he opts to keep on a fixed basis, under an Account called “Ram Capital Account”, then the accounts books will have another account in his name “Ram Current Account”. In the latter account, the profits, interest on capital, salary, or compensation due to him shall be credited and any drawings and interest on drawings shall be debited. The balance in this account will keep fluctuating and hence called a current account but not the capital account. The same happens usually in partnership firms wherein the partners maintain a fixed amount as their capital in the capital accounts, usually in proportion to their agreed profit sharing ratio. Each partner will also have a current account in their name for posting all other transactions of the firm with the partner. Maintaining capital accounts on a fixed basis is a good practice and indicates in the balance sheet the stake of each partner in the business.
FLUCTUATING CAPITAL ACCOUNT
Mostly in case of sole trader-ship, the sole owner prefers to maintain a single account in the owner’s name called Fluctuating Capital Account which keeps on fluctuating because of profits, interest on capital, drawings, interest on drawings etc. and any other transactions with the owner are entered in one single account called Capital Account. Since the balance of the capital account keeps fluctuating, it is called Fluctuating Capital Account. It is the most preferred practice among single-owner business units. However, in the case of Partnership Firm the practice to maintain the capital account on a fluctuating basis is not common as the individual partners’ stake in the business is not very visible in the single account maintained called Capital Account.
In this method all the entries related to drawings, interest on capital and share of profit and loss of partner are recorded in capital account, hence in this method there is no need for current account. The treatment of various transactions in the current account or in fluctuating capital account needs a clear understanding of the journal entries and the nature of the transactions.
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