Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.
Capital Accounts in a partnership firm can be of two types:
- Fixed Capital Account
- Fluctuating Capital Account
A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:
- Capital introduced
- Capital withdrawn/ Drawings
For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.
Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.
Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.
Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.
However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.
To summarise the difference between the two following table can be used:
| Fixed Capital Account | Fluctuating Capital Account |
| Non-recurring transactions are recorded. | Recurring transactions are recorded. |
| Created where the number of recurring transactions is high to maintain a separate record. | Created where the number of recurring transactions is low. |
| Examples:
· Capital introduced · Capital withdrawn |
Examples:
· Interest on capital · Interest in drawings |
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Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called. A company may issue its shares and receive the money either in full or in instalments. The instalments are named: Application money – Received by a compRead more
Reserve capital is part of ‘Uncalled capital’. ‘Uncalled capital’ means the outstanding amount on shares on which the call money is not yet called.
A company may issue its shares and receive the money either in full or in instalments. The instalments are named:
For example, X Ltd issues 1000 shares at a price of Rs. 100 per share which is payable Rs. 25 at application, Rs. 30 at the allotment, Rs. 25 at the first call and Rs. 20 at the second and final call.
The shares at fully subscribed and X Ltd has called and received money till the first call. The second call is not made yet.
This amount of Rs 20,000 (1000 x Rs.20) will be uncalled capital.
Now, It is up to the management when to make the second and final call.
If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital.
Such shares which are not fully called are known as party paid shares.
It is ultimately payable to the company by the shareholders of partly paid shares at the time of dissolution.
Reserve capital is not shown either in the balance sheet or in the notes to accounts to the balance sheet. But one can ascertain it just by examining the notes to accounts to the balance. If the shares are partly paid and the management seems to have no intention of calling the outstanding money then such uncalled share capital is reserve capital.
Reserve capital is neither a liability nor an asset for the company.
But at the time of winding up of the company, it becomes a liability for the shareholders to pay the balance amount of their shares.
By now, you must have understood why reserve capital is not part of unsubscribed capital. It is because reserve capital is related to shares that are issued and subscribed.
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