Examkin

Question

Difficulty: MediumFixed and Fluctuating Capital Accounts

Bisi and Audu are partners in a business entity that operates a fluctuating capital account system. On 1st January 2025, Bisi's capital account had a credit balance of ₦1,500,000\text{₦}1,500,000. For the year ended 31st December 2025, the following details relate to Bisi:
- Additional capital introduced: ₦300,000\text{₦}300,000
- Share of net profit: ₦450,000\text{₦}450,000
- Interest on capital: ₦75,000\text{₦}75,000
- Annual partner salary: ₦120,000\text{₦}120,000
- Total cash drawings: ₦200,000\text{₦}200,000
- Interest on drawings: ₦15,000\text{₦}15,000

What is the closing balance of Bisi's capital account as at 31st December 2025?

  1. A
    ₦1,800,000\text{₦}1,800,000
  2. B
    ₦2,660,000\text{₦}2,660,000
  3. ₦2,230,000\text{₦}2,230,000Answer
  4. D
    ₦2,245,000\text{₦}2,245,000

Answer

₦2,230,000\text{₦}2,230,000
Under the fluctuating capital account system, only one account (the Capital Account) is maintained for each partner. All capital injections, profit shares, salaries, and interest on capital increase the capital balance (credited), while all drawings and interest on drawings decrease the capital balance (debited). Adding all additions (₦1,500,000+₦300,000+₦450,000+₦75,000+₦120,000=₦2,445,000\text{₦}1,500,000 + \text{₦}300,000 + \text{₦}450,000 + \text{₦}75,000 + \text{₦}120,000 = \text{₦}2,445,000) and subtracting all deductions (₦200,000+₦15,000=₦215,000\text{₦}200,000 + \text{₦}15,000 = \text{₦}215,000) results in a closing credit balance of ₦2,230,000\text{₦}2,230,000.

Step-by-Step Solution

1
Calculate total credits to Bisi's capital account
₦1,500,000+₦300,000+₦450,000+₦75,000+₦120,000=₦2,445,000\text{₦}1,500,000 + \text{₦}300,000 + \text{₦}450,000 + \text{₦}75,000 + \text{₦}120,000 = \text{₦}2,445,000
Under the fluctuating capital account system, opening capital, additional capital, profit share, interest on capital, and salaries are credited to the capital account.
2
Calculate total debits to Bisi's capital account
₦200,000+₦15,000=₦215,000\text{₦}200,000 + \text{₦}15,000 = \text{₦}215,000
Drawings and interest on drawings reduce the partner's equity in the business and are debited to the capital account.
3
Compute the closing capital balance
₦2,445,000−₦215,000=₦2,230,000\text{₦}2,445,000 - \text{₦}215,000 = \text{₦}2,230,000
Deducting total debits from total credits yields the net closing capital credit balance.

Key Concept

Fluctuating Capital Account System
Rate this question

Topics

Fixed and Fluctuating Capital Accounts

More questions from this topic