Difference between Fixed and Fluctuating Capital Accounts

Fixed capital account and fluctuating capital account are the terms used in the context of partnership, a partnership is a way of doing business and in case of partnership two or more person come together to start a business and shares its profit and losses in an agreed ratio. All transactions relating to partners of the firm are recorded in the books of the firm through their capital accounts and that is where these two terms come into play. In order to understand both terms, one should look at the difference between a fixed capital account and fluctuating capital account –

Fixed Capital Account VS Fluctuating Capital Account

Meaning

Fixed capital account method is that method in which the capitals of the partner’s remains fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement or requirement of the partners and all other adjustments like share of profit or loss, interest on capital, drawings, etc. are recorded in a separate account which is called partner’s current account whereas fluctuating capital account method is that method in which only one account called capital account is maintained and all adjustments are like share of profit or loss, interest on capital, drawings, etc. are recorded in capital account of the partner.

Number of Accounts

In case of the fixed capital account, two separate accounts are maintained for each partner one is called the current account of the partner and other is called the capital account of the partner whereas in case of fluctuating capital account only one account is maintained which is called the capital account of the partner.

Various Adjustments

In case of fixed capital account all adjustments related to transactions done by the partner with partnership firm like salary paid to partner by partnership firm or interest on capital paid by the firm to partner or drawings made by partner from partnership firm and so on are done in current account of the partner and not in capital account whereas in case of fluctuating capital account since there is only one account, therefore, all the above adjustments are made in the capital account of the partner.

Capital Account Balance

Since in case of capital account there is separate current account for making all adjustments the balance of capital account of partner will remain same provided there is no addition or withdrawal of capital by the partner from the partnership firm whereas in case of fluctuating capital account balance of the partner fluctuates from year to year and will never remain same.

Debit or Credit Balance

Capital account balance at the end of the financial year in case of fixed capital account will always show credit balance but as far as capital account balance of fluctuating capital account is concerned there is no surety that it will show credit balance rather it can show either debit or credit balance at the end of the financial year.

As one can see from the above that there are many differences between the two and that is the reason why some partners follow a fixed capital account method for accounting and some partners follow fluctuating capital account method for accounting depending on their business, choice, and agreement.