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Difficulty: HardFixed and Fluctuating Capital Accounts

Ade and Femi are partners in a business sharing profits and losses in the ratio 3:23:2. The partnership agreement specifies that the firm maintains fixed capital accounts. On 1st January 2025, Ade's capital account balance was ₦1,200,000\text{₦}1,200,000 and his current account had a credit balance of ₦150,000\text{₦}150,000.

During the year ended 31st December 2025, the following transactions occurred:
- Interest on capital is allowed at 5%5\% per annum on opening capital balances.
- Ade is entitled to an annual partner salary of ₦200,000\text{₦}200,000.
- Ade made total drawings of ₦180,000\text{₦}180,000 during the year.
- Interest charged on Ade's drawings was ₦10,000\text{₦}10,000.
- The net profit available for distribution (divisible profit) was ₦750,000\text{₦}750,000.

What is the balance on Ade's current account as at 31st December 2025?

  1. ₦670,000 creditAnswer
  2. B
    ₦1,870,000 credit
  3. C
    ₦1,050,000 credit
  4. D
    ₦520,000 credit

Answer

₦670,000 credit
Under the fixed capital account system, fixed capital accounts remain unaltered while routine transactions (interest on capital, salaries, share of profit, drawings, and interest on drawings) pass through the current account. Crediting the opening balance (₦150,000), interest on capital (₦60,000), salary (₦200,000), and profit share (₦450,000) gives total credits of ₦860,000. Subtracting the debits for drawings (₦180,000) and interest on drawings (₦10,000) leaves a closing credit balance of ₦670,000.

Step-by-Step Solution

1
Calculate Ade's entitlements credited to his Current Account
Interest on Capital: 5%×₦1,200,000=₦60,0005\% \times \text{₦}1,200,000 = \text{₦}60,000; Salary: ₦200,000\text{₦}200,000; Profit Share: 35×₦750,000=₦450,000\frac{3}{5} \times \text{₦}750,000 = \text{₦}450,000.
Under the fixed capital account system, partner appropriations such as salary, interest on capital, and share of profit are credited to the partner's current account.
2
Sum total credit items in Ade's Current Account
Opening Balance (Credit) + Interest on Capital + Salary + Share of Profit = ₦150,000+₦60,000+₦200,000+₦450,000=₦860,000\text{₦}150,000 + \text{₦}60,000 + \text{₦}200,000 + \text{₦}450,000 = \text{₦}860,000.
All additions to a partner's current account increase the credit side of the account.
3
Calculate total debit items in Ade's Current Account
Drawings + Interest on Drawings = ₦180,000+₦10,000=₦190,000\text{₦}180,000 + \text{₦}10,000 = \text{₦}190,000.
Drawings and interest on drawings reduce the partner's equity in the business and are debited to the current account.
4
Determine the net ending balance of the Current Account
Total Credits - Total Debits = ₦860,000−₦190,000=₦670,000 credit\text{₦}860,000 - \text{₦}190,000 = \text{₦}670,000\text{ credit}.
Subtracting total debits from total credits yields the net credit balance at year-end.

Key Concept

Fixed Capital Account System in Partnership Accounting
Estimated Time:2m 0s
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Topics

Fixed and Fluctuating Capital Accounts

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