Under fixed capital, only agreed contributions touch the capital account. Everything that happens during the year, such as profit, salary, interest and drawings, goes through the current account.
This lesson is part of the partnership worked set. It follows partner salary versus employee wage.
What goes where?
| Entry | Account | Side |
|---|---|---|
| Capital contributed at the start | Capital | Credit |
| Extra capital introduced | Capital | Credit |
| Interest on capital | Current | Credit |
| Salary | Current | Credit |
| Share of residual profit | Current | Credit |
| Drawings | Current | Debit |
| Interest on drawings | Current | Debit |
Worked example: the closing current accounts
From the set, the capital balances are Hafiz RM100 000 and Jia Wen RM60 000, and they do not change. The appropriation credits are below.
- Hafiz: interest on capital 5 000 and residual share 37 590.
- Jia Wen: interest on capital 3 000, salary 14 400 and residual share 25 060.
| Hafiz (RM) | Jia Wen (RM) | |
|---|---|---|
| Opening balance | 4 000 Cr | 1 500 Cr |
| Interest on capital | 5 000 | 3 000 |
| Salary | 14 400 | |
| Share of residual profit | 37 590 | 25 060 |
| Drawings | (24 000) | (12 000) |
| Interest on drawings | (780) | (270) |
| Closing balance | 21 810 Cr | 31 690 Cr |
Hafiz: 4 000 + 5 000 + 37 590 − 24 000 − 780 = RM21 810. Jia Wen: 1 500 + 3 000 + 14 400 + 25 060 − 12 000 − 270 = RM31 690. The interest on drawings is worked out in the next lesson.
The mistake that costs marks
One slip is to debit drawings to the capital account, because drawings reduce what the partner has in the firm. Under fixed capital, the capital account then falls when it should stay at RM100 000 and RM60 000.
| Step | Wrong | Right |
|---|---|---|
| Hafiz’s drawings of 24 000 | Debit capital | Debit current account |
| Hafiz’s capital at year end | 76 000 | 100 000 |
| Current account | Not reduced | Reduced by 24 000 |
Check yourself
Suppose Jia Wen introduces RM10 000 more capital on 1 October. The rate is 5%. State the account that records it, and find the interest on this extra capital for the year.
Answer
The extra capital is credited to her capital account, so the capital becomes RM70 000.
It was in the firm for 3 months, from 1 October to 31 December. Interest = 10 000 × 5% × 3/12 = RM125.
The RM10 000 stays in the capital account and does not touch her current account.
What to study next
Next, see how the two drawings figures of RM780 and RM270 are found in explaining interest on drawings. The debit-credit transaction trainer lets you rehearse the postings.
If you want a teacher to check your account placement, see online one-to-one Accounting tuition.