What is the difference between fixed capital and fluctuating capital account? In this guide we will compare both type of accounts in details.
Partners invest their capital contributions to launch or maintain the company. They are noted in the respective capital accounts for each. There are two ways to keep track of partners’ capital accounts: The fixed Capital Method and the Fluctuating Capital Method.
Table of Contents
What is a fixed capital account?
A fixed capital account is a capital account in which a business maintains two distinct accounts for various transactions performed in the partner’s capital.
Each partner’s capital shall be fixed from the commencement of the partnership until the termination of the partnership. There aren’t any adjustments made for things like interest on the capital, pay or commission, or any profit or loss made throughout the operation.
What is a fluctuating capital account?
A partner’s capital fluctuates regularly in a capital account, known as a fluctuating capital account. Each partner’s capital fluctuates under this arrangement.
Each participant will have a capital account credited with the money they first put up. They will credit their capital account with any extra capital introduced over the year.
Difference between fixed capital and fluctuating capital account
|Point of Difference
|fixed capital account
|fluctuating capital account
|This approach is used when the starting balance and closing balance of the partners’ capital accounts are reported unchanged.
|It is used when the partners’ capital account’s initial and closing balances are provided flexibly.
|Capital Interest Rates
|If no long-term changes affect capital, annual interest rates will remain unchanged.
|Interest on capital amount varies annually, whether or not there are any permanent adjustments.
|If there are no long-term changes relating to capital, the capital amount will remain constant annually.
|Whether there are permanent adjustments or not, the capital amount fluctuates yearly.
|Balance Sheet Procedure
|The credit balance will be displayed on the capital-liability side of the B/s. The capital-liability side of the balance sheet will display a credit balance in the current account method, and the asset side will show a debit balance.A credit balance and debit balance
|will be displayed on the capital-liability and assets-receivables sides of the B/s.
|Current account balances can be either debit or credit, while fixed capital accounts always have a credit balance.
|Capital accounts often have a credit balance. Yet, this strategy may result in a negative capital account balance.
|Two accounts are formed in the company’s books to record every transaction the partners have with the company: the capital and current accounts.
|In the company’s records, a capital account is formed to record all partner transactions with the company.
|Treatment of Transaction
|Capital and changes in the capital are reported in the “capital account”. The current account records transactions that are not permanent capital.
|The “capital account” keeps track of all capital and non-capital transactions.
|All partner-related transactions, such as payments, withdrawals, interest on withdrawals, capital interest, etc., are recorded in the partners’ current account and not the partners’ capital account.
|All partner-related transactions, including salary, withdrawals, interest on withdrawals, capital, etc., are recorded in one account. Under this system, only one account, the Partners’ Capital Account, is maintained.
|Frequency of Change
|Except for certain situations, the balance in the Fixed Capital Account remains constant.
|From period to period, the balance fluctuates significantly.
The distinction between fixed capital and fluctuating capital methods is whether transactions other than capital additions and withdrawals are reflected in the partners’ capital accounts. Using one of these methods is crucial since it helps determine how much equity is invested in each company share. Together with taxes, they calculate dividend payments and share the capital surplus.