Partners’ Capital Account is prepared to ascertain the closing capital balances of the partners of a firm. These capital balances are shown on the Liabilities side of the New Balance Sheet. Below given is the comprehensive format of the Partners’ Capital Account.
Procedure to Prepare Partners’ Capital Account
The following are the various steps involved in the preparation of Partners’ Capital Account.
- First of all, the opening balance of capital is shown on the credit side of the Partners’ Capital Account as ‘Balance b/d’. In case, if the capital balance of any of the partners appears on the Assets side of the Balance Sheet (in the
question), then it is shown on the debit side of the Capital Account as ‘Balance b/d’. - Then, Revaluation Profit is transferred to the Credit side and in case of Loss, it is transferred to the Debit side of the capital account.
- Thirdly, we need to transfer reserves such as, General Reserve, Reserve Fund, Investment Fluctuation Fund, Workmen Compensation Fund and Contingency Reserve (see NOTE), Credit Balance of P & L etc. are transferred
to the credit side of the capital account in the old profit sharing ratio of old partners. - Similarly, on the debit side, losses such as Debit Balance of P & L, Deferred Revenue Expenditure, Advertisement Suspense Account, etc. are transferred to the debit side of the capital account in the old profit sharing ratio of
old partners. - Goodwill already appearing in the old balance sheet is transferred to the debit side of the capital account in the old profit sharing ratio of old partners.
- Also, at the time of admission, any amount brought in cash by the new partner as his/her Capital contribution and Premium for Goodwill is recorded on the credit side of the Partners’ Capital Account.
- Premium for goodwill brought in by the new partner is also transferred to the credit side of the Partners Capital Account in the sacrificing ratio of the old partners. In case any partner gains, then his/her gaining share is
recorded is recorded on the debit side of the account. - If any share of premium credited to the old partners is withdrawn by them, then it is recorded on the debit side of the Partners’ Capital Account.
- If any of the partners has taken-over any of the assets, then it is shown on the Debit side and if any liability is paid-off by any partner, then it is shown on the credit side of the capital account.
- Finally, if the total of the credit side exceeds the total of the debit side, then the final capital balance of the partners is shown ‘Balance c/d’ on the Debit side. On the contrast, if the total of the debit side exceeds the total of the
credit side, then the final capital balance of the partners is shown as ‘Balance c/d’ on the Credit side. - If the Partners’ Capital Account shows a credit balance (Cr. Side > Dr. Side), then it is also shown on the Liabilities side of the Balance Sheet. On the other hand, if the Partners’ Capital Account shows a debit balance (Dr. Side Cr. Side), then it is shown on the Assets side of the Balance Sheet.
- Also, often there exists some reserves in the form Employees Provident Fund, Provision for Tax, Taxation Reserve, Joint Life Policy (JLP) Reserve and Depreciation Reserve (such as Machinery Replacement Reserve) in the
Old Balance Sheet. It should be noted that such items are not distributed among the partners and are shown on the Liabilities side of the New Balance Sheet of the new firm.
Also, Read
Profit and Loss Account
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
Accounting Software
Accounting software is an integral part of the computerized accounting system. The accounting software should be selected after considering the level of skill and proficiency of the accounting professionals.
What are Accounting Reports?
Accounting Reports: When the collected data is processed and manipulated in a useful sense that can be understood by the users without any ambiguity, then it becomes information.
Transaction Processing System
Transaction Processing System (TPS) refers to a computerized system that records, processes, validates, and stores routine transactions that occur in various functional areas of a business on daily basis.
What is Hidden Goodwill?
In the case of Hidden Goodwill, the value of goodwill is not mentioned at the time of admission of a new partner. It can be considered as one of the methods for calculating the value of goodwill of the firm.