There are two methods by which the capital accounts of partners can be maintained. Select the main points of differences between the fixed and fluctuating capital methods from the following:
A. Under fixed capital method, the capital of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn, whereas under the fluctuating capital method, capital of the partners fluctuates.
B. Under fixed capital method, all items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in Partners' Current Account, whereas, under fluctuating capital method, all the adjustments are recorded directly in the capital accounts of the partners.
C. Under fixed capital method, the partners' capital accounts will always show a credit balance and partners' current account, on the other hand, may show a debit or a credit balance, whereas under the fluctuating capital method, the capital account may sometimes show a debit balance.
D. The partners' capital accounts and current account will always show debit balance, whereas under the fluctuating capital method the capital account will always show a credit balance.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → A, B and C only
The two methods differ in where a partner’s other dealings with the firm are recorded: in a separate Current Account under the fixed capital method, or directly in the Capital Account under the fluctuating capital method.
A. Under fixed capital method, the capital of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn, whereas under the fluctuating capital method, capital of the partners fluctuates. Correct. Under the fixed method the Capital Account moves only for fresh capital or a withdrawal of capital; under the other method every adjustment changes it.
B. Under fixed capital method, all items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in Partners’ Current Account, whereas, under fluctuating capital method, all the adjustments are recorded directly in the capital accounts of the partners. Correct. This is why a fixed-capital firm keeps two accounts for each partner and a fluctuating-capital firm only one.
C. Under fixed capital method, the partners’ capital accounts will always show a credit balance and partners’ current account, on the other hand, may show a debit or a credit balance, whereas under the fluctuating capital method, the capital account may sometimes show a debit balance. Correct. Drawings and losses sit in the Current Account under the fixed method, so the Capital Account stays in credit. Under the fluctuating method they hit the Capital Account itself, and heavy drawings or losses can turn it into a debit.
D. The partners’ capital accounts and current account will always show debit balance, whereas under the fluctuating capital method the capital account will always show a credit balance. Incorrect. It reverses the facts: a fixed Capital Account always shows a credit balance, not a debit, and a fluctuating Capital Account can sometimes show a debit balance, so “always a credit balance” is wrong too.
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