This topic gets a little bit complicated to explain and I am aware that different teachers seem to have different approaches in teaching Capital and Current Account in partnership account. Some would encourage the opening of both capital and current account just because students will make less mistakes and more presentable answers but some would encourage throwing everything into Capital Account (don’t ask me why) but I have a feeling that it saves more time and you don’t have to open a current account.
As for now, I will try to explain opening both accounts instead of opening capital account alone (Fixed Capital Account).
Capital account works the same way as Sole Proprietorship account. For example, if Allen invests $10,000 and Ben invests $20,000 into AB Business, then you will have the following double entries:
So then that’s it. You wouldn’t be require to do anything to Capital Account anymore.
As for Current Account, since you will not be doing anything to the Capital Account, most entries will be posted to current account as shown below.
So now it’s time to know how to do everything in Capital Account (Fluctuating Capital Account.) Referring to the diagram below, I have drawn both Allen Capital Account and Profit And Loss Appropriation account (in a T-account format). With these two accounts, you will now be able to see the link. If you see it carefully (remember double entry?) Try matching up interest on capital from Allen Capital Account to Profit And Loss Appropriation Account and try to match the rest of them! You will probably smile later.
Note: You can also match the current account above to the profit and loss appropriation account since it’s double entry kind of thing.
One thing to note is: You might not be able to see drawings in the profit and loss appropriation account because drawing is not an expenses, it is a direct cash withdrawal (it has a personal relationship to the partner but not the business operations) so it will not appear in your Profit and Loss account. To reiterate, anything that has no relationship to the business operations such as drawing and goodwill, will only affect the Balance Sheet accounts.