Capital Accounts of the Partner: Fluctuating Capital Method (original) (raw)
Last Updated : 28 Apr, 2026
Every partners contribute capital in partnership firm and share profits or losses. To record all these transactions, capital accounts are maintained. One of the methods is the Fluctuating Capital Method, where the capital balance changes regularly due to various adjustments.
Meaning of Fluctuating Capital Method:
The Fluctuating Capital Method is a system where a partner’s capital keeps changing every year, as all transactions like profit, loss, drawings, interest, and salary are recorded in a single capital account. Only one account is maintained per partner, and the capital balance changes frequently, reflecting all adjustments in the same account. The credit side includes items such as initial and additional capital, interest on capital, salary or commission, and share of profit, while the debit side records drawings, interest on drawings, and share of loss. This method is simple and commonly used in small firms.
**Steps of Fluctuating Capital Method:
Under this method, only Capital Account is prepared following the given steps:
**Step 1: A Capital Account is prepared, and the initial capital invested by the partner is credited to the Capital Account. Further, any additional investments made by the partners are also credited, and any drawings from the capital are recorded on the debit side of the capital account.
**Step 2: All the Receipts related to partners, such as Interest on capital, the salary of the partner, the profit share of the partner, commission, etc., are recorded on the credit side of the Capital Account.
**Step 3: The debit side of a Capital Account records all the expenses or liabilities related to the partner, such as Interest on drawings.
**Step 4: The profit is distributed according to the profit sharing ratio among the partners. The profit is credited and the loss is debited, respectively.
**Step 5: Then the closing capital of the partner is calculated by subtracting the debit side of the Capital Account from the credit side. The closing balance is then transferred to a Balance sheet as a Partner's Capital Account.
Formats (**When the Capital is Fluctuating):
**Illustration:
A and B are the partners sharing profit and loss in the ratio of 2:1 with a capital of ₹5,00,000 and ₹2,50,000, respectively on 1st April, 2020. The Partnership Deed provides the following clause:
- Interest on Capital to be paid to each partner @8% p.a.
- Salary of ₹1,750 per month to be paid to B.
- B is also entitled to receive a commission of 10% of the Net Profit remaining after deducting Interest on Capital and salary and after charging his commission.
- The profit for the year ended 31st March, 2021, after charging B's salary was ₹2,25,000.
Prepare Partner's Capital Account under Fluctuating Capital Method.
**Solution:
**Working Note:
**1. Calculation of profit before charging B's salary:
Profit before charging B's salary= Profit after charging B's salary+ B's salary
Profit before charging B's salary= 2,25,000+21,000
Profit before charging B's salary= ₹2,46,000.
**2. Calculation of Partner's Commission:
Profit after charging Interest on Capital= Profit before charging Interest on Capital− Interest on Capital
Profit after charging Interest on Capital= 2,25,000− 60,000
Profit after charging Interest on Capital= ₹1,65,000
B's Commission (after charging such commission)= 1,65,000\times \frac{10}{100+10}
B's Commission (after charging such commission)= ₹15,000.