Which of the following is NOT a feature of the fluctuating capital method in a partnership?
- AUnder the fluctuating capital method, only one account, i.e. capital account is maintained for each partner
- BThe partners' capital accounts will always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital.
- CAll the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners.
- DIn the absence of any instruction, the capital account should be prepared by this method.
Solution & Step-by-step Explanation
Under the Fluctuating Capital Method, all changes and adjustments (like salary, interest on capital, drawings, etc.) are recorded directly in the Capital Account. As a result, the balance fluctuates constantly year after year and can even become negative (a debit balance). The statement describing capital remaining fixed unless there is an injection/withdrawal of capital applies to the Fixed Capital Method, making option B incorrect for fluctuating capital.