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Capital and current accounts

Partners entering a partnership agreement are not required to contribute equally to the capital. The contribution is usually in cash but it can also be in the form of an asset. The amount of capital of each partner remains the same year by year. Current accounts are ’moving’ accounts as each of the current account’s balance changes all the time, being affected by share of profit, interest on capital, drawings, and interest on drawings, and salary if any. The balances in the capital accounts on the other hand remain unchanged. However, it can happen that a partner may make additional capital contribution during an accounting period. Unlike capitals on which partners receive interest, partners do not receive interest on the balances in their current accounts. Partners’ capital and current accounts appear separately on the balance sheet.

The cash invested by the partners as capitals is posted to these accounts:

Debit cash account
Credit partner’s capital account
Gains

If a partner’s contribution as capital is not cash but an asset, the following accounts are recorded with the market value of the asset.

Debit asset account
Credit partner’s capital account


David - Capital Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$





20XX







1 Jan Bank
30,000


Goliath - Capital Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$





20XX







1 Jan Bank
20,000


David - Current Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


31 Dec Drawings
1,880

31 Dec Interest on Capital

1,500
" Interest on drawings
51
" Share of profits
5,000
" Balance c/d
4,569
















6,500



6,500














20X1







01 Jan Balance b/d
4,569


Goliath - Current Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


31 Dec Drawings
740

31 Dec Interest on Capital
1,000
" Interest on drawings
19
" Share of profits
5,000
" Balance c/d
5,241
















6,000



6,000














20X1







01 Jan Balance b/d
5,241


In the absence of current accounts, postings are done to the capital accounts. The balances in the capital accounts therefore change year by year. Examples of the capital account:

David - Capital Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


31 Dec Drawings
1,880

01 Jan Bank
30,000
" Interest on drawings
51
31 Dec Interest on Capital
1,500
" Balance c/d
34,569
" Share of profits
5,000












36,500



36,500














20X1







01 Jan Balance b/d
34,569


Goliath - Capital Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


31 Dec Drawings
740

01 Jan Bank
20,000
" Interest on drawings
19
31 Dec Interest on Capital
1,000
" Balance c/d
25,241
" Share of profits
5,000












26,000



26,000














20X1







01 Jan Balance b/d
25,241


Having a current account and a fixed capital account ensures the capital account balance is not overdrawn which is not possible if there is no current account and all postings are done in the capital account. An overdrawn current account will show a debit balance.

Last Updated (Friday, 08 October 2010 16:22)