6.1. Current and capital accounts are prepared as per the SOPs as per accounting standards

Current and Capital Accounts for Partners

In a partnership, each partner has two main accounts in the ledger:

1. Capital Account – Records permanent investments made by the partner and their share of accumulated profits.

2. Current Account – Records temporary transactions such as drawings, interest on capital, partner salaries, and share of profit/loss.

These accounts are prepared as per SOPs and accounting standards to ensure accurate tracking of each partner’s equity and transactions.

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1. Capital Account

Purpose:

• To show the partner’s initial and additional investment in the business.

• To reflect the partner’s permanent share of profit.

Typical Entries in Capital Account:

Key Point:

• Permanent balance that remains in the business unless the partner withdraws capital.

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2. Current Account

Purpose:

• To track temporary transactions affecting the partner’s equity:

  • Drawings

  • Salary or remuneration

  • Interest on capital or drawings

  • Share of profit/loss

Typical Entries in Current Account:

Key Point:

• Current account starts with zero each period and adjusts with transactions throughout the accounting period.

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3. Preparation Steps According to SOPs

1. Open ledger accounts for each partner:

   • Capital Account

   • Current Account

2. Record capital contributions in the capital account.

3. Record drawings, salaries, and interest in current accounts.

4. Allocate share of profits or losses from the Profit & Loss Appropriation Account to current accounts.

5. Prepare closing balances:

   • Capital account shows permanent capital

   • Current account shows net effect of temporary transactions

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4. Example

Assume:

• Partner A invests Ksh 100,000 and Partner B invests Ksh 50,000.

• Drawings: A = 10,000; B = 5,000

• Profit sharing: A 60%, B 40%

• Partner salaries: A = 5,000, B = 3,000

Capital Accounts:

Current Accounts:

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5. Short Exam-Ready Summary

• Capital Account: Permanent investment + share of accumulated profits.

• Current Account: Tracks temporary transactions like drawings, salary, interest, and share of profits/losses.

• SOP Compliance: Accounts must reflect accurate partner equity, follow double-entry principles, and comply with accounting standards.

• Closing Balances: Capital = permanent investment; Current = net temporary transactions.