Which of the following is not the feature of fluctuating capital in partnership-
Which of the following is not the feature of fluctuating capital in partnership-
Solution
In partnership accounting, there are two methods of maintaining capital accounts: Fixed Capital Method and Fluctuating Capital Method.
The statement in Option 2 describes a situation where "capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital."
This is a characteristic of the Fixed Capital Method, not the Fluctuating Capital Method.
In Fluctuating Capital Method:
- Only one account (Capital Account) is maintained per partner
- The capital balance keeps changing every year
- All transactions like profit share, drawings, interest on capital, salary, commission are recorded directly in the Capital Account
- The balance fluctuates from year to year
In Fixed Capital Method:
- Two accounts are maintained: Capital Account and Current Account
- The Capital Account shows a fixed balance (unless capital is introduced or withdrawn)
- All other adjustments are recorded in the Current Account
- The capital remains constant
Since the statement in Option 2 refers to capital remaining "same (fixed) year after year", it contradicts the basic nature of fluctuating capital where the balance continuously changes. This makes Option 2 incorrect as a feature of fluctuating capital method.
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