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Tuesday, February 9, 2010

Capital Account and Current Account in Partnership

Capital account

The balance for the capital account will always be a brought forward credit entry in the partnership accounts, because the capital contributed by proprietors is a liability of the business.
When a partnership is formed, each partner puts in some capital to the business. These initial capital contributions are recorded in a series of capital accounts, one for each partner. Partners do not have to put in the same amount.

In addition to capital account, each partner normally has:
  • A current account.
  • A drawing account.

Current account

A current account is used to record the profits retained in the business by the partner.
The main differences between the capital and current account in accounting for partnerships are as follows.

  • The balance on the capital account remains static from year to year.
  • The current is continually fluctuating up and down, as the partnership makes profits which are shared out between the partners, and as each partner takes out drawings.
  • A further difference is that when the partnership agreement provides for interest on capital, partners receive interest on the balance in their capital account, but not on the balance in their current account.

Drawing account

The drawings accounts serve exactly the same purpose as the drawings account for a sole trader. Each partner’s drawings are recorded in a separate account. At the end of an accounting period, each partner’s drawings are cleared to his current account.

Current account – Debit
Drawings account – Credit

The partnership balance sheet will therefore consist of:

  • The capital accounts of each partner.
  • The current accounts of each partner, net of drawings.

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Unknown said...

Partners current account treated as current liability or current asset ?

I have observed in one of the balance sheet that of the partnership firm that the partner capital account on liabilities side and partner capital account on assets side.

for comparison:

2010 partners capital is Rs.50.00 lakhs on liabilities side were as partners capital account is Rs. 90 lakhs on assets side.
2011 partners capital is Rs.60.00 lakhs on liabilities side were as partners capital account is Rs. 85 lakhs on assets side.
2012 partners capital is Rs.65.00 lakhs on liabilities side were as partners capital account is Rs. 100 lakhs on assets side.
But it will give negative effect in the balance sheet analysis and it shows a negative capital. How to treat it as a banker.

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