Final answer:
Yes, using the allocation on capital balances method affects the original capital accounts of partners by adjusting them to reflect the share of income or loss. Outside investors are sought to provide additional capital and mitigate financial risks, including those due to exchange rate fluctuations that could cause trade imbalances.
Step-by-step explanation:
When partners use the allocation on capital balances method to allocate income or loss, it directly adjusts their original capital accounts based on the agreed upon percentages. This method ensures that the profits and losses distributed to partners are proportionate to their initial investments or capital contributions to the partnership. Companies may choose not to rely solely on their profits for financial capital because doing so might limit their growth potential. Instead, they seek outside investors to provide additional capital, which allows for more significant investment in resources, expansion, and innovation.
Sole reliance on internal profits may also expose a business to a higher risk of financial instability, particularly if the company encounters a period where profits are low or losses occur. Additionally, external funding can provide a cushion against such risks.
A specific concern related to international businesses is the risk of an exchange rate that could lead to a large trade imbalance, resulting in very high inflows or outflows of financial capital. This can affect the stability and predictability of financial planning for businesses that operate across borders.