Capital Account and Current Account in Partnership

The balance for the capital account will always be a forwarded 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 usually has:

• A current account.

• A drawing account.

Current account

This is used to record the profits retained in the business by the partner.

The main differences between the capital and this account in accounting for partnerships are as follows.

• The balance on the capital account remains static from year to year.

• The current is continuously 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 partners drawings are recorded in a separate account. At the end of an accounting period, each partners drawings are cleared to his current account.

Current account – Debit

Drawings account – Credit

The partnership balance sheet will hence consist of:

• The capital accounts of each partner.

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

Accounting Adjustments for Loans by Partners

In addition, it is sometimes the case that an existing or previous partner will make a loan to the partnership in which case he becomes a creditor of the partnership. On the balance sheet, such a loan is not included as partners' funds, but is shown separately as a long-term liability. This is the case where or not the loan creditor is also an existing partner.

However, interest on such loans will be credited to the partners current account if he is an existing partner. This is administratively more convenient, especially when the partner does not particularly want to pay the loan interest in cash immediately it becomes due. Remember:

• Interest on loans from a partner is accounted for as an expense in the profit and loss account, and not as an appropriation of profit, even though the interest is added to the current account of the partners.

• If there is no interest rate specified, the partnership act provides for to be paid at 5% per annual on loans by partners.

Source by Randika Lalith Abeyinghe

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