Question

The capital accounts of partners will always show a ________ balance under fixed capital account method

• A. Debit
• B. Credit
• C. Zero
• D. Negative

Answer 1

The Correct Option is B

Step 1: Understand the Capital Account Balance

In accounting, a partner’s capital account represents their contribution to the partnership. Since the partnership "owes" this capital back to the partner, it’s recorded as a credit balance in the books (capital is a liability for the partnership).

Step 2: Analyze the Fixed Capital Account Method

Under the fixed capital account method, the capital account doesn’t change with day-to-day transactions like profits or drawings. These are recorded in the Current Account. So, the capital account will always show the initial or agreed-upon capital amount—a credit balance.

Step 3: Evaluate the Options

Let’s look at the given options:

• Debit: A debit balance means the partner owes the partnership, which isn’t typical under this method unless the account is overdrawn (not the case here).
• Credit: A credit balance reflects the partner’s capital contribution, which aligns with the fixed capital method’s purpose of maintaining a stable capital amount.
• Zero: A zero balance would mean no capital, which isn’t typical unless the partner has withdrawn everything (not implied here).
• Negative: A negative balance (debit exceeding credit) could happen if a partner withdraws more than their capital, but the fixed capital method prevents this by keeping the capital account fixed.

Step 4: Determine the Correct Answer

Since the fixed capital account method keeps the capital account at the initial contribution level (a liability for the partnership), it will always show a credit balance.

Final Answer

The capital accounts of partners will always show a Credit balance under the fixed capital account method.