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Past Adjustments in Partnership

Last Updated : 05 Apr, 2023
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In a Partnership, the profit is divided among partners according to the conditions mentioned in the partnership deed. For example, according to the conditions of the Partner’s Salary, Interest on Capital, etc. Even though there are conditions, sometimes partners forget to fulfil them or make some errors in fulfilling these conditions. Some of these errors are as follows:

  • Interest not given on partner’s loan
  • Interest on capital wrongly calculated or not paid
  • Wrong profit-sharing ratio
  • Interest on drawings not charged or charged at the wrong rate
  • Salary or commission paid to a partner without considering whether or not the partner is entitled to it

Because of the above-mentioned errors, the profits are wrongly distributed among the partners. Hence, it becomes necessary to adjust this through the capital accounts before or after the closure of accounts. 

Adjustments before Closing Accounts:

Sometimes a company finds errors before the accounts are closed. The adjustment of such errors is made before the closure of accounts.

Adjustments after Closing Accounts:

Sometimes a company finds after the closure of accounts that any condition provided for in the partnership deed has not been fulfilled or a mistake has been made. In these situations, the company does not reopen the accounts in the following year to rectify the mistake or error instead adjustment entries are passed through the partner’s capital accounts. Before passing the adjustment entries, it has to determine which partner has received an extra share of profit and which partner has received less. Ultimately, the account of partner who has received an extra amount is debited, and the account of partner who has received a less amount is credited. 

Steps for the Calculation of Amount of Past Adjustment Entry

The steps are as follows:

Step 1: The first step is to determine the amount which should have been credited by way of interest on capital, salary, commission, share of profit, etc.

Step 2: In the second step, the amount already credited by way of interest on capital, salary, commission, share of profit, etc., is calculated.

Step 3: The next step involves calculation of the difference between the amounts calculated in the above two steps. 

Step 4: After calculating the difference, the company has to find out which partner has received excess and which partner has received short. 

Step 5: The last step of calculation of amount of adjustment entry involves passing the adjusting journal entry by debiting the Capital A/c of the partner who has received excess amount and crediting the Capital A/c of the partner who has received short. 

Format of Past Adjustment:

Format of Past Adjustment

 

Adjustment Journal Entry

 

Case 1: When Interest on Capital is less Charged:

Adjustment Table

 

Illustration:

Gaurav, Kashish, and Vaibhav are partners in a firm sharing profits and losses in the ratio of 2:3:1. Their fixed capitals were ₹6,00,000; ₹2,00,000 and ₹4,00,000, respectively. Interest on capital for the year 2020-21 was credited to them @ 9% p.a. instead of 10% p.a. The profit for the year after charging interest was ₹5,00,000. Prepare the Adjustment Table and pass the Adjustment Entry.

Solution:

Adjustment Table

 

Adjustment Entry

 

Case 2: When Interest on Capital is more Charged:

Adjustment Table

 

Illustration:

Sahil, Vishal, and Anand are partners in a firm sharing profits and losses in the ratio of 2:1:2. Their fixed capitals were ₹3,00,000; ₹6,00,000, and ₹12,00,000, respectively. Interest on capital for the year 2020-21 was credited to them @ 10% p.a. instead of 8% p.a. The profit for the year after charging interest was ₹6,00,000. Prepare the Adjustment Table and pass the Adjustment Entry.

Solution:

Adjustment Table

 

Adjustment Entry

 

Case 3: When Interest on Capital is not Charged:

Adjustment Table

 

Illustration:

Sukant and Bijay are partners in a firm sharing profits and losses in the ratio 3:5. Their fixed capitals were ₹10,00,000 and ₹18,00,000, respectively. After the closing of accounts of the year, it was found that interest on capital @10% p.a. as provided in the partnership deed has not been credited to the Capital Accounts of the partners. Pass a necessary journal entry to rectify the error.

Solution:

Adjustment Table

 

Adjustment Entry

 

Case 4: When Interest on Drawings is not Charged:

Adjustment Table

 

Illustration:

Akanksha, Sayeba, and Nupur are partners in a firm sharing profits and losses in the ratio 3:2:1. After the final accounts of the firm have been prepared, it was discovered that interest on drawings had not been taken into consideration. The interest on drawings of the partners was ₹500, ₹350, ₹200, respectively. Pass a necessary journal entry to rectify the error.

Solution: 

Adjustment Table

 

Adjustment Entry

 

Case 5: When Profit is already distributed in deed ratio without adjustment of Interest on Capital, Salary, Commission, and Interest on Drawings:

Adjustment Table

 

Note: If Profit is given then it is taken on Adjustment. 

Illustration:

The net profit of a firm for the year ended 31st March 2020 was ₹1,20,000, which has been duly distributed amongst its partners Hardik, Sumit, and Shubham in their agreed proportions of 2:1:1, respectively. It was discovered on 10th April 2020 that the undermentioned transactions were not passed through the books of accounts of the firm for the year ended 31st March 2020, which stood duly closed on that date:

  1. Interest on Capital @ 10% p.a.
  2. Interest on Drawings: Hardik ₹1,400; Sumit ₹1,000; Shubham ₹600.
  3. Salary of ₹20,000 to Hardik and ₹30,000 to Sumit.
  4. Commission due to A on a special transaction, ₹12,000

The capital accounts of the partners on 1st April 2019 were: Hardik ₹1,00,000; Sumit ₹80,000; Shubham ₹60,000. Suggest a journal entry that should be passed on 10th April 2020 that will not affect the Profit & Loss Account of the firm for 2019-20 and at the same time rectify the position of the partners. 

Solution:

Adjustment Table

 

Adjustment Table

 

Adjustment Entry

 

Case 6: When Profit already distributed in wrong ratio without adjustment of Interest on Capital, Salary, Commission, and Interest on Drawings:

Illustration:

Ishika, Harshita, and Astha are partners in a firm with capital as ₹1,20,000; ₹60,000; and ₹60,000, respectively on 1st April 2021. As per the provisions of the deed:

  1. Astha was to be allowed a remuneration of ₹12,000 p.a.
  2. Interest at 5% p.a. was to be provided on capital.
  3. Profits were to be divided in the ratio of 3:1:1.

Ignoring the above terms, net profit of ₹72,000 for the year ended 2021-22 was divided among the partners equally. Prepare the Adjustment Table and pass an Adjustment Entry to rectify the error.

Solution:

Adjustment Table

 

Adjustment Entry

 

Case 7: Computation of Opening Capital (When Interest on Capital is not Given):

Illustration:

Anshul, Abhinav, and Navya are partners in a firm sharing profits and losses in the ratio of 2:3:5. After division of the profit for the year ended 31st March 2022 their capitals were ₹1,00,000; ₹1,20,000; and ₹1,40,000. During the year, they withdraw ₹40,000 each. The profit of the year was ₹40,000. The partnership deed provided that interest on capital will be allowed @10% p.a., but while preparing the final accounts interest on partners’ capital was not allowed. Calculate the capital of Anshul, Abhinav, and Navya on 1st April 2021 and pass the necessary journal entry for providing Interest on Capital.

Solution:

Computation of Opening Capital

 

Adjustment Table

 

Adjustment Entry

 

Case 8: Changes in Profit Sharing Ratio:

Illustration:

Nisha, Shreya, and Kanika were three partners in a firm sharing profits and losses in the ratio 1:3:4, respectively. Nisha wants that she should share equally in the profit with Shreya and Kanika, and she further wants that the change in profit-sharing ratio should come adjustment into effect, respectively for the last three years. Shreya and Kanika have no objection to this. The profit for the last three years were ₹10,000, ₹12,000 and ₹14,000. Show the adjustment of profit for the last three years with the help of journal entries.

Solution:

Adjustment Entry

 

Working Notes:

Total Profit of the last 3 years = 10,000 + 12,000 + 14,000

= ₹36,000

Net Effect

 

Case 9: When Partnership Deed is not maintained:

Illustration:

The capitals of Sabyasachi, Dharmendra, and Rishab as on 31st March 2021 amounted to ₹60,000; ₹2,20,000; and ₹4,40,000, respectively. The profits for the year 2020-21 was ₹1,20,000 and was distributed in the ratio 3:2:1 after allowing Interest on Capitals @ 10% p.a. During the year, each partner withdrew ₹80,000. The partnership deed was silent as to profit sharing ratio but provided for Interest on Capital @ 12%. Pass the necessary adjustment journal entry.

Solution:

Adjustment Table

 

Adjustment Entry

 

Working Notes:

Calculation of Interest on Capital already provided and Opening Capitals:

Capital at the Opening

 

Case 10: Adjusting Entry when Manager is treated as a Partner:

Net Effect

 

Adjustment Journal Entry

 

Note: Revised profit for calculation Share of Profit = Given Profits + AMount already given as Manager – Amount to be given as Partner

Illustration:

Arun and Anurag are partners sharing profits and losses in the ratio of 5:4. They employed Bhavook as their manager to whom they paid a salary of ₹1,500 per month. Bhavook has deposited ₹40,000 on which interest was payable @9% p.a. At the end of 2020-21 (after division of the year’s profits), it was decided that Bhavook should be treated as a partner with effect from 1st April 2017-18 with 1/6th share of profits, his deposit being considered as capital carrying interest at 6% p.a. like capitals of other partners. The firm’s profits and losses after allowing interest on capitals were: 2017-18 Profit ₹1,18,000; 2018-19 Profit ₹1,25,200; 2019-20 Loss ₹8,000; 2020-21 Profits ₹1,56,000. Record the necessary Journal Entries to give effect to the above. 

Note: Interest on Capital is to be allowed as a charge

Solution:

Amount Received by Bhavook as Manager

 

Bhavook as a Partner entitled to get in 4 years

 

Share of Bhavook as a partner is ₹82,800, which is more than ₹57,600; i.e., ₹25,200. Therefore, Bhavook will be credited with ₹25,200, and Arun & Anurag will be debited in 5:4 ratio with ₹25,200.

Adjustment Entry

 



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