JAIIB Exam Study Material: Partners Capital and Loan Accounts
PARTNERS’ CAPITAL AND LOAN ACCOUNTS
A. Methods of Maintaining Capital Accounts
The Partners’ capital accounts may be maintained by two methods, viz., Fixed Capital Method and Fluctuating Capital Method. Generally, the partnership deed mentions the method of maintaining capital accounts. If a particular method is stated in the partnership deed then the firm has to maintain the capital accounts only by that method. However, if there is no mention about the method of maintaining capital accounts in the partnership deed, the capital accounts are maintained as per the Fluctuating Capital Method.
(a) Fixed Capital Method
Under this method, for each partner two accounts are maintained. One is called the partner’s capital account and the other is called partner’s current account. Partner’s capital account is credited with the amount of capital contributed by the partner. All the adjustments regarding interest on capital, interest on drawings and share in profit or loss are recorded in the current account.
(b) Fluctuating Capital Method
Under this method, all the transactions relating to a partner are entered in only one capital account maintained for him. No current account is opened as in the Fixed Capital Method. Capital account is credited, not only with the amount contributed by him/her as capital, but other transactions, such as interest on capital, drawings and share of profits, are also recorded in the same capital account.
B. Partners’ Loan Accounts
Loans given by the partners, exclusive and independent of contributions by way of capital, are recorded in separate accounts called Partners’ Loan Accounts, keeping the Capital Accounts undisturbed.
C. Interest on Capital, Drawings and Loans from Partners
If there is an agreement to allow interest on capital, loan and drawings, interest is calculated at a rate specified in the agreement. In the absence of any such provision in the agreement, no interest will be allowed/charged on the capital and drawings and interest at the rate of 6 per cent per annum will be allowed on the partners’ loans to the firm. It may further be noted that, in the absence of any agreement to the contrary, interest to partners, on the capital account, will be paid only if there is a profit. However, interest on a loan, given by the partners, has to be allowed, irrespective of the fact that there is no profit.
