explain the uses of and differences between capital and current accounts

Capital Accounts 💰

Capital accounts record the money that each partner puts into the business and the share of profits or losses that is allocated to them. Think of it as each partner’s personal bank account for the partnership.

• Initial capital contributions.
• Additions (e.g., extra investment).
• Reductions (e.g., withdrawals).
• Share of profits or losses.

Example: Partner A invests £10,000, Partner B invests £5,000. After a year, the partnership earns £3,000 profit. If profits are shared 60% to A and 40% to B, the capital accounts become:

Current Accounts 🏦

Current accounts track the day‑to‑day transactions that affect each partner’s share of the partnership’s profits and losses but are not part of the capital. Think of it as a running tally of how much each partner owes or is owed.

• Drawings (withdrawals).
• Payments received on behalf of the partnership.
• Expenses paid by a partner.
• Share of profits or losses.

Analogy: If the partnership is a shared bike, the capital account is the bike’s frame (fixed), while the current account is the pedal’s motion (changing every ride).

Key Differences ⚖️

1. Purpose: Capital accounts show ownership and investment; current accounts show day‑to‑day profit/loss flow.
2. Balance changes: Capital changes only when money is added or withdrawn or profits/losses are allocated; current changes with every transaction.
3. Closing: Capital accounts are closed at partnership dissolution; current accounts are closed at the end of each accounting period.
4. Presentation: Capital appears in the balance sheet; current appears in the income statement.

Exam Tips 📚

• Remember the mnemonic “Capital is the bank, Current is the cash flow.”
• When calculating profit share, always use the profit/loss before any withdrawals.
• Check the wording: “capital account” refers to ownership; “current account” refers to transactions.
• Use the formula: $$\text{Capital}_{\text{final}} = \text{Capital}_{\text{initial}} + \text{Profit Share} - \text{Drawings}$$
• Practice with past paper questions that ask you to update both accounts after a series of transactions.