Capital and current accounts
In a partnership, each partner's owner's equity is usually split into two accounts when the fixed capital method is used:
- Capital account — records the original capital invested. Its balance stays fixed unless capital is formally added or reduced.
- Current account — records the yearly transactions: interest on capital, salary and share of profit (credit); drawings and interest on drawings (debit).
Key idea
Current account balance = Opening balance + Interest on capital + Salary + Share of profit − Drawings − Interest on drawings. A credit balance means the business owes the partner; a debit balance means the partner owes the business.
Statement of financial position
In the equity section, each partner's capital and current account are shown separately, then totalled to give total equity.
Keeping the two accounts apart makes the statement easier to read. A reader can see at a glance how much each partner originally invested and, separately, how much profit has been left in the business or drawn out over the years. This is one reason most partnerships prefer the fixed capital method.
Worked example
Example
Chin's current account: opening balance RM2,000 (credit); interest on capital RM1,800; salary RM6,000; share of profit RM9,000; drawings RM7,000; interest on drawings RM400.
Closing balance = 2,000 + 1,800 + 6,000 + 9,000 − 7,000 − 400 = RM11,400 (credit).
Fixed versus fluctuating capital
Under the fluctuating capital method only one account per partner is kept, and every item — interest, salary, profit share, drawings — passes through it, so its balance changes every year. The fixed capital method is generally preferred because it keeps the invested capital clearly visible and separate from the yearly profit dealings.
Remember
With fixed capital, drawings never go into the capital account — they go into the current account. The capital balance changes only when extra capital is brought in.