Fixed Vs fluctuating capital account

Fixed Vs fluctuating capital account

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Created By Admin Last Updated Wed, 30-Dec-2020

To understand the difference between a fixed capital account and fluctuating capital account you first, need to understand the concept of the capital account. Let’s understand it first-

A capital account is a general account that shows some special transactions like proprietor’s investment in his own business, the aggregate amount of earning, expenses of companies etc. There are some transactions that affect the capital of any company like interest on capital, interest on drawings, salaries to partners etc.

The fixed and fluctuating capital accounts are the methods of capital account creation. Let’s now understand the concept and difference between both terms.

Fluctuating capital account method

As the name donates, fluctuate means anything having unpredictable ups and down, thus in this method the capital of each partner keeps on changing from time to time.

Fixed capital account method

Fixed capital is the portion of total capital outlay of a business invested in physical assets such as factories, vehicles, and machinery that stay in the business almost permanently, or more technically, for more than one accounting period. Under this method, firms prepare 2 accounts that show different transactions related to the capital of partners. These 2 accounts are- fixed capital account, current account

 In a fixed capital account, a firm prepares a fixed account with very basic capital-related transactions. Unlike the capital account, under these repetitive capital-related transactions does not affect the capital balance. Like the salary of an employee, interest on capital, interest on drawings, etc.

Whereas in current account, it includes all the capital related transactions other than the initial investment of capital, addition of capital. Hence, it mainly includes- interest on capital, interest on drawings, salaries and other remuneration to employees, commission to employees, and even more.

Difference between fixed capital method and fluctuating capital method-

·         In fixed capital method two accounts are prepared- the capital account and current account. Whereas in the fluctuating capital method only a single account is prepared that is capital account.

·         In fixed the capital method the capital balance remains un-change whereas a capital balance fluctuates in fluctuating capital method.

·         Both capital and current account in fixed capital method appears in the balance sheet while the only capital account appears in the balance sheet in fluctuating capital method.

·         The fixed capital method is used then it must be specified in the partnership deed. On the other hand, if the fluctuating capital method is used it is not necessary to specify the method under the partnership deed.

·         The fixed account will always show a credit balance.

·         Fluctuating capital account may show debit balance as well.

CONCLUSION-  Both these terms-fixed and fluctuating capital accounts are widely used in accounts in the context of partnership as we maintain the capital accounts in these two ways, thus one must understand and learn the difference between the two. Hope by the information provided above you can conclude their differences.