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Difficulty: HardFixed and Fluctuating Capital Accounts

Kofi and Segun are partners in a firm operating a fixed capital account system. On 1st January 2025, Segun's current account had a credit balance of ₦120,000\text{₦}120,000. During the year ended 31st December 2025, the following transactions occurred in respect of Segun:
- Partnership salary: ₦180,000\text{₦}180,000
- Interest on capital: ₦40,000\text{₦}40,000
- Personal drawings made: ₦150,000\text{₦}150,000
- Interest charged on drawings: ₦10,000\text{₦}10,000
- Share of profit: ₦210,000\text{₦}210,000
- Interest on loan advanced by Segun to the firm: ₦30,000\text{₦}30,000 (paid directly into his personal bank account)

What is the balance on Segun's Current Account as at 31st December 2025?

  1. ₦390,000 CreditAnswer
  2. B
    ₦420,000 Credit
  3. C
    ₦400,000 Credit
  4. D
    ₦410,000 Credit

Answer

The balance on Segun's Current Account as at 31st December 2025 is ₦390,000 Credit.
Under a fixed capital account system, partner capital remains fixed while daily transactions, appropriations, and drawings pass through the current account. Segun's current account is credited with his opening balance (₦120,000), salary allowance (₦180,000), interest on capital (₦40,000), and share of profit (₦210,000), totaling ₦550,000. It is debited with drawings (₦150,000) and interest on drawings (₦10,000), totaling ₦160,000. The net closing balance is ₦550,000 - ₦160,000 = ₦390,000 Credit. Interest on loan paid into his bank account is a financial charge in the Profit and Loss Account and does not affect the current account.

Step-by-Step Solution

1
Identify items to credit to Segun's Current Account
Total Credit items = Opening Credit Balance (₦120,000) + Partnership Salary (₦180,000) + Interest on Capital (₦40,000) + Share of Profit (₦210,000) = ₦550,000.
Under a fixed capital system, all appropriations, entitlements, and opening credit balances increase the partner's current account balance on the credit side.
2
Identify items to debit to Segun's Current Account
Total Debit items = Personal Drawings (₦150,000) + Interest on Drawings (₦10,000) = ₦160,000.
Drawings and interest on drawings reduce the partner's balance and must be placed on the debit side of the current account.
3
Examine the non-current account item (Interest on Loan)
Interest on partner's loan (₦30,000) is excluded from the current account calculation.
Interest on partner loan is a charge against profit in the main Profit and Loss Account and paid via bank/cash, not an appropriation credited to the current account.
4
Calculate the net closing Current Account balance
Net balance = ₦550,000 (Credits) - ₦160,000 (Debits) = ₦390,000 Credit.
The excess of credit entries over debit entries yields a closing credit balance.

Key Concept

Fixed Capital System and Partner Current Account Preparation
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Topics

Fixed and Fluctuating Capital Accounts

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