Under the fixed capital method, the capital account stays the same and the current account takes every yearly movement. Profit and interest are credited to the current account, and drawings are debited.
This lesson is part of the partnerships chapter. It posts the results of preparing a profit appropriation account.
Which entry goes in which account?
| Item | Current account side |
|---|---|
| Interest on capital | Credit |
| Partner’s salary | Credit |
| Share of residual profit | Credit |
| Drawings | Debit |
| Interest on drawings | Debit |
The opening balance is a credit if the partner is owed money by the firm, and a debit if the partner has over-drawn.
Worked example: Siti and Raj
Siti and Raj share profits 3:2 and have fixed capital of RM60 000 and RM40 000. After appropriation, the credits to their current accounts are as follows.
- Siti: interest on capital 3 000 and residual share 25 800, totalling RM28 800.
- Raj: interest on capital 2 000 and residual share 17 200, totalling RM19 200.
Opening balances are Siti RM3 000 credit and Raj RM1 500 debit. Drawings are Siti RM18 000 and Raj RM12 000.
| Siti (RM) | Raj (RM) | |
|---|---|---|
| Opening balance | 3 000 Cr | 1 500 Dr |
| Interest on capital | 3 000 | 2 000 |
| Share of residual profit | 25 800 | 17 200 |
| Drawings | (18 000) | (12 000) |
| Closing balance | 13 800 Cr | 5 700 Cr |
Siti: 3 000 + 3 000 + 25 800 − 18 000 = RM13 800. Raj: −1 500 + 2 000 + 17 200 − 12 000 = RM5 700.
Check the profit credited. Siti 28 800 plus Raj 19 200 is RM48 000, which equals the net profit in the appropriation account, because this example has no salary or interest on drawings.
The mistake that costs marks
One slip is to post profit and drawings to the capital account when the capital is fixed. The capital balance then changes when it should stay the same.
| Step | Wrong | Right |
|---|---|---|
| Siti’s share of profit | Credit capital account | Credit current account |
| Siti’s drawings | Debit capital account | Debit current account |
| Siti’s capital after the year | 60 000 + 28 800 − 18 000 = 70 800 | 60 000 |
If the question does not mention a current account, the partners may be using fluctuating capital. In that case the capital account takes every entry, and there is no separate current account.
Check yourself
A partner’s current account has an opening credit balance of RM2 000. Share of profit credited is RM15 000. Drawings are RM11 000 and interest on drawings is RM300. Find the closing balance.
Answer
Credits: 2 000 + 15 000 = 17 000.
Debits: 11 000 + 300 = 11 300.
Closing balance = 17 000 − 11 300 = RM5 700 credit.
What to study next
Next, learn to read the clauses of an agreement in applying a stated partnership agreement. You can test your entries with the debit-credit transaction trainer.
If you want a teacher to check your postings, see online one-to-one Accounting tuition.