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Fundamentals of Accounting · Partnership and LLP Accounts

Fixed and Fluctuating Capital Accounts of Partners

Updated 11 October 2026 · Fact-checked

Under the fixed capital method, a partner's capital account stays unchanged except for agreed capital additions or withdrawals. Profit share, interest, salary and drawings go to a separate current account. Under the fluctuating method, all these items go to the capital account, so its balance changes every year. Solve by listing each item and posting it to the right account.

Understand Capital Accounts: Fixed and Fluctuating

A partner's capital account shows how much the partner has invested in the firm. The firm keeps one for each partner. The partnership deed decides how these accounts are kept. There are two methods.

Under the fixed capital method, the capital account balance stays the same year after year. It changes only when the partners agree to bring in more capital or take capital out. Everything else goes to a second account called the current account. This covers share of profit, interest on capital, salary, commission, drawings and interest on drawings. Each partner therefore has two accounts.

Under the fluctuating capital method, there is only one account for each partner: the capital account. Profit share, interest, salary, drawings and interest on drawings are all posted there. The balance rises and falls every year. This is why it is called fluctuating.

A current account can have a credit balance or a debit balance. A credit balance means the firm owes the partner. It is shown on the liabilities side, next to the capital. A debit balance means the partner has drawn more than earned. It is shown on the assets side. Under the fluctuating method, a capital account can also turn debit if drawings and losses are large.

Keep capital apart from a partner's loan to the firm. A loan, or advance, is not capital. On settlement after dissolution, the Indian Partnership Act, 1932 (Section 48) pays a partner's advances before the partner's capital. So the two must be shown separately. Unless the deed says otherwise, interest on capital is allowed only if the deed provides for it. Always read the deed terms in the question.

Key rules to remember

Fixed capital: closing balance
Closing capital = Opening capital + Capital introduced − Capital withdrawn
Profit, interest, salary and drawings do not enter this account.
Fixed capital: current account
Closing current A/c = Opening (Cr) + Interest on capital + Salary/Commission + Share of profit − Drawings − Interest on drawings − Share of loss
Treat an opening debit balance as a minus. A negative result means a debit balance.
Fluctuating capital: closing balance
Closing capital = Opening capital + Additional capital + Interest on capital + Salary/Commission + Share of profit − Drawings − Interest on drawings − Share of loss − Capital withdrawn
All items go into one account.
Opening capital from closing
Opening capital = Closing capital − Additions to capital (profit, interest, salary, new capital) + Deductions (drawings, interest on drawings, losses)
Use this when the question gives closing balances and asks for opening capital.
Sides of the account
Credit: opening balance, capital introduced, interest on capital, salary, profit. Debit: drawings, interest on drawings, capital withdrawn, loss
Keep this fixed in your mind and every account will follow.

How to solve Capital Accounts: Fixed and Fluctuating questions

Use this method for any question on partners' capital and current accounts.

  1. 1Read the question and find the method. If it says capital is fixed, you need a capital account and a current account for each partner. If it says nothing and no separate current balances are given, use the fluctuating method.
  2. 2List every item for each partner: opening balances, capital introduced or withdrawn, interest on capital, salary or commission, drawings, interest on drawings, and profit or loss share.
  3. 3Check the deed terms. Interest on capital, salary and interest on drawings apply only if the question says so.
  4. 4Complete the appropriation first. Deduct interest on capital and salary from profit, then divide the balance in the profit-sharing ratio. Tally the total of appropriations with the profit.
  5. 5Draw the account in columns, one column per partner. Put debits on the left and credits on the right.
  6. 6Post each item to the correct side. For fixed capital, post only capital changes in the capital account and all else in the current account.
  7. 7Balance each account. Show the closing balance and tell whether it is credit or debit.
  8. 8Check that the total of the profit shares, interest and salary equals the net profit. Then check that capital plus current balances agree with the question.

Quickest way: Column running total method

When to use it: Use this when time is short and you only need closing balances, not the full ledger format.

  1. Write each partner's opening balance with a plus sign for credit and a minus sign for debit.
  2. Add all credit items: new capital, interest on capital, salary, profit share.
  3. Subtract all debit items: drawings, interest on drawings, capital withdrawn, loss share.
  4. The result is the closing balance of the capital account under fluctuating capital, or of the current account under fixed capital.
  5. Write the final accounts in the proper format only if the question asks for the account.

Common mistakes in Capital Accounts: Fixed and Fluctuating

  • Posting profit, drawings and interest to the capital account when capital is fixed

    Students carry the fluctuating method into every question.

    Fix: When you see the word fixed, send every item except capital introduced or withdrawn to the current account.

  • Deducting interest on drawings from the partner's side wrongly, or adding it

    Students forget that interest on drawings is a charge on the partner and an income of the firm.

    Fix: Debit the partner's account with interest on drawings. Treat it as a deduction.

  • Showing a debit balance of the current account on the liabilities side

    Students always put partner accounts on the liabilities side.

    Fix: A credit balance goes on the liabilities side. A debit balance goes on the assets side.

  • Treating a partner's loan as capital

    Both are money put in by the partner.

    Fix: Show the loan as a separate liability. It does not enter the capital account, and it carries its own interest.

  • Calculating interest on capital on the closing balance

    Students use the latest figure they see.

    Fix: Use the capital that stood during the year. In the simple case, use the opening balance, and adjust for any capital introduced or withdrawn during the year.

  • Applying salary, interest or commission when the deed does not give it

    Students assume every partnership allows them.

    Fix: Allow such items only if the question states them or the deed provides for them.

Worked examples

Example 1

A and B are partners sharing profits 3:2. Their fixed capitals are ₹5,00,000 and ₹3,00,000. Interest on capital is 6% p.a. and A gets a salary of ₹60,000 a year. Net profit before appropriation is ₹2,00,000, and it already includes interest on drawings. Drawings: A ₹40,000, B ₹30,000. Interest on drawings: A ₹1,000, B ₹750. Opening current accounts: A ₹20,000 credit, B ₹10,000 debit. Find the closing balance of each current account.

Show the solution
  1. Interest on capital: A = 6% of ₹5,00,000 = ₹30,000. B = 6% of ₹3,00,000 = ₹18,000.
  2. Profit left to divide = ₹2,00,000 − ₹30,000 − ₹18,000 − ₹60,000 = ₹92,000.
  3. A's share = 3/5 of ₹92,000 = ₹55,200. B's share = 2/5 of ₹92,000 = ₹36,800.
  4. A's current account: credit items = ₹20,000 + ₹30,000 + ₹60,000 + ₹55,200 = ₹1,65,200. Debit items = ₹40,000 + ₹1,000 = ₹41,000. Closing = ₹1,24,200 credit.
  5. B's current account: credits = ₹18,000 + ₹36,800 = ₹54,800. Debits = ₹10,000 (opening) + ₹30,000 + ₹750 = ₹40,750. Closing = ₹54,800 − ₹40,750 = ₹14,050 credit.
  6. The capital accounts stay at ₹5,00,000 and ₹3,00,000 because they are fixed.

Answer: A's current account closes at ₹1,24,200 credit and B's at ₹14,050 credit. Fixed capitals remain ₹5,00,000 and ₹3,00,000.

Example 2

C and D share profits equally. Their capitals are fluctuating: ₹4,00,000 and ₹2,00,000 at the start of the year. Interest on capital is 5% p.a. on opening capital. D gets a salary of ₹24,000 a year. D brought in ₹50,000 additional capital on the last day of the year (no interest on it). Drawings: C ₹30,000, D ₹20,000. There is no interest on drawings. Net profit before appropriation is ₹1,00,000. Find the closing capitals.

Show the solution
  1. Interest on capital: C = 5% of ₹4,00,000 = ₹20,000. D = 5% of ₹2,00,000 = ₹10,000.
  2. Profit left = ₹1,00,000 − ₹20,000 − ₹10,000 − ₹24,000 = ₹46,000. Each partner gets ₹23,000.
  3. C's capital account: ₹4,00,000 + ₹20,000 + ₹23,000 − ₹30,000 = ₹4,13,000.
  4. D's capital account: ₹2,00,000 + ₹50,000 + ₹10,000 + ₹24,000 + ₹23,000 − ₹20,000 = ₹2,87,000.
  5. Check: all items go in the capital account, because the method is fluctuating.

Answer: C's closing capital is ₹4,13,000 and D's closing capital is ₹2,87,000.

Exam tips

  • Look at the first line of the question. The words fixed or fluctuating decide the whole layout.
  • Draw both a capital account and a current account in the fixed method. Examiners give separate marks for each.
  • Show the profit appropriation workings clearly, even when the question asks only for partners' accounts.
  • Label every entry with its description, such as By Interest on Capital. State each closing balance as credit or debit.
  • If the question gives opening balances only for capital, check whether it mentions current accounts. This tells you which method applies.

Practice questions from Partnership and LLP Accounts

Capital Accounts: Fixed and Fluctuating: frequently asked questions

What is the main difference between fixed and fluctuating capital?

In the fixed method, the capital balance stays the same and all other items go to a current account. In the fluctuating method, everything goes to the capital account, so the balance changes every year.

What is the difference between a capital account and a current account?

The capital account records the amount the partner has invested. The current account records yearly items such as profit share, salary, interest and drawings. The current account is used mainly when capital is fixed.

Can a current account have a debit balance?

Yes. If drawings and interest on drawings exceed what the partner has earned, the balance is debit. It is shown on the assets side of the balance sheet.

What should I do if the question does not state the method?

If the question gives only capital balances and no current accounts, use the fluctuating method. If it gives both capital and current account balances, the capital is fixed.