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Difficulty: Very hardFixed and Fluctuating Capital Accounts

Musa and Chidi are partners in a firm sharing profits and losses in the ratio 3:23:2. On 1st January 2025, their capital balances were \text{\mathbb{N}}500,000 and \text{\mathbb{N}}300,000 respectively.

During the year ended 31st December 2025, the following transactions occurred:
- On 1st July 2025, Musa introduced an additional capital of \text{\mathbb{N}}100,000, while Chidi withdrew \text{\mathbb{N}}50,000 of his capital.
- Partnership deed allows interest on capital at 10%10\% per annum on time-proportioned capital.
- Chidi is entitled to an annual partner salary of \text{\mathbb{N}}40,000.
- Interest on drawings is charged at 5%5\% per annum. Musa drew \text{\mathbb{N}}60,000 on 1st April 2025, and Chidi drew \text{\mathbb{N}}40,000 on 1st October 2025.
- On 1st March 2025, Musa advanced a loan of \text{\mathbb{N}}100,000 to the firm. Interest on partner loan is payable at 6%6\% per annum.
- The net profit of the firm before accounting for interest on Musa's loan for the year was \text{\mathbb{N}}250,000.

If the partnership maintains fluctuating capital accounts, what is the closing balance of Musa's capital account as at 31st December 2025 (in \text{\mathbb{N}})?

Answer: 667900 NGN

Answer

The closing balance of Musa's fluctuating capital account as at 31st December 2025 is NGN 667,900.
Under the fluctuating capital method, all transactions affecting a partner—including opening capital, additional capital introduced, interest on capital, share of profits, drawings, and interest on drawings—are combined into a single capital account. The closing balance of NGN 667,900 is obtained by adding all credit items (opening balance NGN 500,000 + additional capital NGN 100,000 + interest on capital NGN 55,000 + share of profit NGN 75,150 = NGN 730,150) and subtracting all debit items (drawings NGN 60,000 + interest on drawings NGN 2,250 = NGN 62,250). Note that interest on Musa's loan (NGN 5,000) is a charge against firm income in the Profit and Loss Account and credited to a separate Loan Account, so it reduces the net profit available for appropriation to NGN 245,000 but does not directly enter the capital account.

Step-by-Step Solution

1
Calculate interest on partner loan and net profit after loan interest
Loan interest = 6% * NGN 100,000 * (10/12) = NGN 5,000. Adjusted Net Profit = NGN 250,000 - NGN 5,000 = NGN 245,000.
Interest on a partner loan is a charge against profit (P&L expense), not an appropriation of profit.
2
Compute time-apportioned interest on capital for each partner
Musa: (10% * NGN 500,000) + (10% * NGN 100,000 * 6/12) = NGN 55,000. Chidi: (10% * NGN 300,000) - (10% * NGN 50,000 * 6/12) = NGN 27,500. Total = NGN 82,500.
Capital introduced or withdrawn mid-year must be time-apportioned to determine accurate interest on capital.
3
Compute interest on drawings for each partner
Musa: 5% * NGN 60,000 * (9/12) = NGN 2,250. Chidi: 5% * NGN 40,000 * (3/12) = NGN 500. Total = NGN 2,750.
Interest on drawings is calculated from the date of withdrawal to the end of the accounting period.
4
Determine divisible residual profit and Musa's share
Divisible Profit = NGN 245,000 + NGN 2,750 - NGN 82,500 - NGN 40,000 = NGN 125,250. Musa's share (3/5) = NGN 75,150.
Appropriations (salary and interest on capital) are deducted from available profit, and interest on drawings is added.
5
Calculate Musa's closing balance under the fluctuating capital method
Musa's Closing Capital = NGN 500,000 (opening) + NGN 100,000 (addition) + NGN 55,000 (interest on capital) + NGN 75,150 (profit share) - NGN 60,000 (drawings) - NGN 2,250 (interest on drawings) = NGN 667,900.
Under the fluctuating capital method, all adjustments (additions, drawings, interest, salary, and profit shares) pass directly through a single capital account.

Key Concept

Fluctuating Capital Account Preparation and Profit & Loss Appropriation Adjustments
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Topics

Fixed and Fluctuating Capital Accounts

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