In the case of fixed capital method, following two accounts are maintained.
In the case of fixed capital method, following two accounts are maintained.
Solution
Under the Fixed Capital Method, two separate accounts are maintained for each partner:
Capital Account → This account shows a fixed balance throughout the accounting period. It records only:
- Initial capital introduced by the partner
- Additional capital introduced (if any)
- Capital withdrawn permanently (if any)
The balance in this account remains constant unless there is introduction or withdrawal of capital.
Current Account → This account records all adjustments and transactions that affect the partner's interest. It includes:
- Share of profit or loss
- Drawings made by the partner
- Interest on capital
- Interest on drawings
- Partner's salary
- Partner's commission
The main advantage of this method is that the capital balance remains undisturbed and clearly visible, while all operational adjustments are neatly recorded in the current account. The current account can have either a debit balance (if drawings and losses exceed profits and interest) or a credit balance (if profits and interest exceed drawings and losses).
Correct Option: 3 (Capital account and Current account)
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