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Answers
Explanation:
Capital Accounts: Fixed and Fluctuating
A Capital Account is a general ledger account which shows some of the special transactions like proprietor’s investment in his own business, the aggregate amount of earning, expenses of companies, etc. There are many more transactions which affect the Capital. Like: Interest on Capital, Interest on Drawings, Salaries to the Partners, Commission for the Partners, etc. These values are put in Profit and Loss Appropriation Account and at the same time credited or debited to their respective Capital Accounts.
Methods of Capital Account Creation
Fluctuating Capital Account Method
Fixed Capital Account Method
Fluctuating Capital Account Method
Firstly, fluctuate means anything having unpredictable ups and downs. Hence, under this method, the Capital of each Partner keeps on changing from time to time.
A firm only a single account name “Capital” which shows all the necessary information about the different transactions related to the capital. It mostly starts with credit amount of the capital invested by the partner in the initial time of the business.
All the adjustments leading to a decrease in the Capital are shown on the Debit side of the Capital Account. For example, Drawings by Partners and interest comes on the debit side of the Capital account. All the adjustments leading to an increase in the Capital are shown on the Credit side.
Fixed Capital Account Method
Under this method, the firm prepares 2 accounts which show different transactions related to the capitals of the partners.
These two accounts are as follows :
(a) Fixed Capital Account
A firm prepares Fixed Account with very basic capital related transactions. Unlike the Capital account, under this repetitive capital related transactions does not affect the Capital balance. Like, Salary of employees, commission for employees, interest on capital, interest on drawings, etc.
The firm opens the account in the name of “Fixed Capital Account”. Initial Investment will appear on the credit side as the starting entry. Only 2 kinds of Capital related transactions can affect its balance :
(1) Addition of Capital
(2) Permanent Withdrawal of Capital
[Note: Sometimes even the Non-Permanent Withdrawals or Drawings are also included on the debit side of this account.]
b) Current Account
It includes all the capital related transactions other than the initial investment of capital, addition of capital and withdrawal of capital. Hence, It mainly includes items such as :
1. Interest on Capital
2. Interest on Drawings
3. Salaries and other remuneration to employees
4. Commission to employees and even more.
Hence, by preparing this account, we can let the main capital of the business “fixed”. As a result of which there is no fluctuation at all. Hence, the firm will be able to find out the exact reasons behind the change.
Fixed rate bonds are capital accounts that usually pay a set of interest, agreed at the beginning for a certain period of time. They generally offer higher interst rate than easy access account especially you opt for a fixed rate bond that last for two or more year.
A partnership term.when the capital of partners are fluctuating, all adjustments with regards to the interest on capital on drawing, partners salaries etc are passed through the capital accounts of the partners.