(a) Explain the term fixed capital account. (b) State three conditions that would result in a change in the profit and loss sharing ratio of a partnership. ...

Answer Details

(a) Fixed capital account

A fixed capital account is a partner's capital account whose balance is kept unchanged (fixed) from period to period. Only the amount of capital originally contributed (and any later permanent introduction or withdrawal of capital) is recorded in it. All other regular items such as interest on capital, salary, share of profit, drawings and interest on drawings are not passed through this account; instead they are recorded in a separate current account for each partner. This keeps each partner's true capital contribution clearly shown at all times.

(b) Three conditions that would change the profit and loss sharing ratio

1. Admission of a new partner, whose share must be provided out of the old partners' shares.
2. Retirement or death of a partner, so the remaining partners share the outgoing partner's portion.
3. A mutual agreement (amendment of the partnership deed) by the existing partners to alter the ratio, often because of changes in capital contributed or duties performed.

(Any three.)

(c) Three circumstances giving rise to the creation of goodwill

1. Admission of a new partner, when goodwill is valued to compensate the old partners for the reputation they built.
2. Retirement or death of a partner, when goodwill is valued so the outgoing partner receives a fair share of it.
3. A change in the profit-sharing ratio among the existing partners, which alters their relative claims on the firm's goodwill.
4. Amalgamation of the partnership with another firm or conversion into a company.

(Any three.)