Under fluctuating capital method the firm paid partners personal vehicle insurance of Rs 9000. What is the correct capital treatment?

Correct answer: Debit capital account

Personal vehicle insurance belongs to the partner personally, not to the business. If the firm pays this premium, the firm has effectively paid an amount on behalf of the partner. In partnership accounting, such a private payment is treated as the partner’s drawings because it reduces the amount belonging to that partner. It is not a business expense and should not reduce the firm’s profit as an ordinary expense.

Under the fluctuating capital method, drawings are recorded directly on the debit side of the partner’s capital account. Therefore option A, “debit capital account,” is correct. A credit to capital would increase the partner’s balance, which is opposite to the effect of a private payment. It also does not belong in the Profit and Loss Appropriation Account or as a firm expense.