How do you prepare the Partners' Current Accounts using the fixed capital method based on the given partnership details and year-end adjustments?

Question

Zain Abbas · Accepted Answer

Okay, let's break down the second question step-by-step, focusing on the concepts and calculations involved.

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**Question 2: Capital Account Preparation (Fixed Capital Method) - Explained Slowly**

Usman and Fahad are partners with **fixed capitals** of PKR 800,000 and PKR 600,000 respectively. They share profits and losses **equally**.

*   **Fixed Capitals:** This is a very important piece of information. When capitals are fixed, it means the initial capital amounts (PKR 800,000 for Usman and PKR 600,000 for Fahad) generally remain unchanged unless there's a fresh injection of capital or a permanent withdrawal. All other transactions related to partners (like interest on capital, salaries, share of profit, drawings, interest on drawings) are recorded in a separate account called the **Partners' Current Account**.

*   **Share Profits and Losses Equally:** This means for any profit or loss remaining after all appropriations, each partner will get 50%.

For the year ended December 31, 2026, the following information is available:

*   **Interest on capital: 8% per annum.**
    *   This is an appropriation of profit. It's calculated on the fixed capital balances.
    *   Usman's Interest on Capital: PKR 800,000 \* 8% = PKR 64,000
    *   Fahad's Interest on Capital: PKR 600,000 \* 8% = PKR 48,000
    *   These amounts will be credited (added) to their respective Current Accounts.

*   **Fahad is entitled to a commission of 5% of net profit after charging his commission.**
    *   This is a common calculation trick. "After charging his commission" means the commission itself is deducted from the profit *before* calculating the percentage.
    *   The formula for "after charging" commission is: `Commission = Net Profit * (Rate / (100 + Rate))`
    *   Net Profit before commission = PKR 350,000
    *   Fahad's Commission = PKR 350,000 \* (5 / (100 + 5)) = PKR 350,000 \* (5 / 105) = PKR 16,666.67 (let's round to PKR 16,667 for simplicity in this example, but in exams, maintain precision or follow rounding rules).
    *   This commission will be credited (added) to Fahad's Current Account.

*   **Net profit for the year before any appropriations was PKR 350,000.**
    *   This is the starting point for distributing profit.

*   **Drawings during the year: Usman PKR 70,000, Fahad PKR 50,000.**
    *   Drawings are amounts of cash or goods taken by partners for personal use.
    *   These reduce the partners' share of profit/capital and will be debited (subtracted) from their respective Current Accounts.

*   **Interest on drawings: Usman PKR 4,000, Fahad PKR 3,000.**
    *   This is a charge *to* the partners, meaning it increases the firm's profit available for distribution and reduces the partners' share.
    *   These amounts will be debited (subtracted) from their respective Current Accounts.

**Required:**
Prepare the Partners' Current Accounts for the year ended December 31, 2026.

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**Steps to Prepare Partners' Current Accounts:**

1.  **Calculate the Distributable Profit:** First, we need to determine how much profit is left to be shared by the partners after all appropriations (interest on capital, commission, interest on drawings). This is usually done in a Profit and Loss Appropriation Account (even if not explicitly asked, it helps in calculation).

| Particulars                               | Amount (PKR) |
    | :--------------------------------------- | :----------- |
    | Net Profit (before appropriations)       | 350,000      |
    | Add: Interest on Drawings                |              |
    |     Usman            | 4,000        |
    |     Fahad            | 3,000        |
    | **Total Profit Available for Appropriation** | **357,000**  |
    | Less: Interest on Capital                |              |
    |     Usman            | (64,000)     |
    |     Fahad            | (48,000)     |
    | Less: Fahad's Commission                 | (16,667)     |
    | **Profit Available for Distribution (Residual Profit)** | **228,333**  |

2.  **Distribute the Residual Profit:**
    *   Since they share profits equally:
    *   Usman's Share of Profit = PKR 228,333 / 2 = PKR 114,166.50 (round to PKR 114,167)
    *   Fahad's Share of Profit = PKR 228,333 / 2 = PKR 114,166.50 (round to PKR 114,166)
    *   These amounts will be credited (added) to their respective Current Accounts.

3.  **Prepare the Partners' Current Accounts:**
    *   Current Accounts typically have a Debit side (for reductions) and a Credit side (for additions).
    *   Start with any opening balance (not given here, so assume zero).
    *   Credit side: Interest on Capital, Commission, Share of Profit.
    *   Debit side: Drawings, Interest on Drawings.

**Partners' Current Accounts for the year ended December 31, 2026**