Capital is the money invested by the owner of the business. It is also known as owner's equity or as net worth. It is the total assets minus liabilities. In other words, excess of assets over liabilities is termed as capital. As we know that business is considered as separate entity, hence capital introduced by the owner is also concerned as liability for the business. This could show in an algebraic way as follows:
Capital = Total Assets – Total Liabilities.
As per the agreement, the amount contributed by each partner in the form of cash or other assets within the business and each partner's contribution is known as capital. At the end of the financial year for preparing financial statement it is required to adjust partner's drawings, appropriations, shares of profits and losses within their respective capital accounts for ascertaining closing capital balance. So it is essential to keep records of the said contributions made by the partners and all necessary adjustments in a systematic manner.
Generally capital accounts are maintained in two different ways in partnership accounts. When the capital of the partners remains constant, i.e. no charges are to be made for different appropriations, profits, drawings etc. in the capital account, then all adjustments are to be made through an account called current account, and this procedure is known as fixed capital method. On the other hand, when all adjustments (as mentioned above) are made through capital account, then the procedure is known as fluctuating capital method.
In fixed capital account, generally both opening and closing balances of this account will remain fixed or same. It might only change when the capital is withdrawn or further introduced. In the fluctuating capital both the opening and closing balances of this account will not remain constant or same because it is always fluctuating.