How to prepare partners' capital and current accounts

Step by step

1. Record capital in the capital account. Enter each partner's permanent capital contribution. It stays fixed unless capital is formally changed.
2. Bring in the appropriation figures. Credit the current account with the partner's profit share, salary and interest on capital.
3. Deduct drawings and interest on drawings. Debit the current account with drawings and any interest charged on them.
4. Balance each current account. The balance shows how much the business owes the partner, or the partner owes the business.
5. Show both in the statement of financial position. Capital and current account balances appear in the capital section.

Worked example

A partner with RM50,000 capital, a RM12,000 profit share and RM8,000 drawings has a RM4,000 credit balance on the current account.

Understanding the method

The two accounts answer two different questions. The capital account shows how much the partner has permanently put into the firm. The current account shows what the firm has come to owe the partner (or the partner the firm) from the year's running of the business.

Keeping them apart means the long-term investment is not disturbed each time profits are shared or drawings taken. Capital accounts change only for big events, such as the first investment or extra capital introduced. Current accounts take the year's flow.

Use one test for the current account. Anything that increases what the firm owes the partner is a credit: profit share, interest on capital and salary. Anything that reduces it is a debit: drawings and interest on drawings.

The partnership agreement decides the entries, so read it carefully. Interest on capital may be at a stated rate. Salaries may be credited but never paid in cash.

Interest on drawings may be charged to discourage early withdrawals. Work out the appropriation account first, so the residual profit is known before you write up the current accounts.

Here is an example. Aziz and Bala share residual profit equally. Aziz has RM60,000 capital and Bala RM40,000.

Interest on capital is 10%, and Aziz has a salary of RM12,000. Aziz draws RM9,000 and Bala RM7,000. Profit before appropriations is RM50,000.

Interest on capital is RM6,000 for Aziz and RM4,000 for Bala. With Aziz's salary, appropriations come to 6,000 + 4,000 + 12,000 = RM22,000. The residual profit is 50,000 − 22,000 = RM28,000, so RM14,000 each.

Aziz's current account is credited with 6,000 + 12,000 + 14,000 = RM32,000 and debited with RM9,000 drawings, leaving a credit balance of RM23,000. Bala's is credited with 4,000 + 14,000 = RM18,000 and debited with RM7,000, leaving RM11,000. The capital accounts stay at RM60,000 and RM40,000.

To check, the total credited to the partners for interest, salary and profit share must equal the profit available for appropriation: 22,000 + 28,000 = RM50,000. A partner who takes small drawings against a healthy profit share should end with a credit balance. A partner who overdraws will have a debit balance, which means the partner owes the firm.

Common mistakes: posting drawings to the capital account instead of the current account, and treating a partner's salary as an expense in the income statement. Others are forgetting interest on drawings and ignoring an opening debit balance on a current account.

If you are unsure which items go to the capital account and which to the current account, we can help. One of our teachers can set out both accounts with you for a partnership question and check your balances. Book a trial class

Related skills

• How to prepare a partnership appropriation account
• How to prepare a statement of financial position
• How to write a journal entry

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.