PAST ADJUSTMENTS OF PARTNERSHIP ACCOUNTING(PARTNERSHIP FUNDAMENTALS) WITH A SINGLE ADJUSTMENT ENTRY.

PAST ADJUSTMENTS

PARTNERSHIP ACCOUNTING

PARTNERSHIP FUNDAMENTALS

(SINGLE ADJUSTMENT ENTRY)


 PAST ADJUSTMENTS

ADJUSTMENTS FOR INCORRECT APPROPRIATIONS OF PROFITS IN PAST AFTER CLOSING THE BOOKS.

 

Sometimes after closing the accounts of a partnership firm i.e. preparing the Financial Statements, some Errors and Omissions in the accounts of the earlier years are noticed.

For example---- interest on capital or interest on Drawings is omitted, allowed or charged at low or higher rate, profit or losses are distributed among the partners in a wrong ratio and so on. These errors and omissions are rectified by adjusting the capital accounts of the affected partners by passing -----

 (a)An Adjustment Entry

(a)Adjustment entries

 

(a) When An Adjustment Entry (single adjustment entry) is passed:

 

In this case, net effect of the Errors is determined and an adjustment entry is passed by debiting and crediting the partner’s capital/current Accounts. In this case an adjustment table is prepared. And adjustment entry will be as follows:

 

Partner’s capital/current a/c    Dr.    (who received excess)

        To Partner’s capital/current a/c (who received short)

 

 

 

 

 

Illustration no 1.

P and Q were partners in a firm sharing profits equally. Their fixed capitals were Rs. 1,00,000 and Rs. 50,000 respectively. The partnership deed provided for interest on capital at the rate of 10% per annum. For the year ended 31st March 2016, profits of the firm were distributed without providing the interest on capital.

Pass necessary Adjustment Entry to rectify the error.

 

Calculation of Interest on Capital:

P = 1,00,000*10/100 = 10,000

Q = 50,000*10/100 = 5,000

Total interest on capital = 15,000

The above interest on capital has not been credited to the partners. It is to be credited to the partner’s Current Accounts (fixed Capital), resulting in a loss of Rs. 15,000 to the firm, which is to be debited to the partners in their profit -sharing ratio i.e. equally.  

 

STATEMENT SHOWING THE ADJUSTMENTS

             P’S CURRENT A/C          Q’S CURRENT A/C                           FIRM

PARTICULARS                                                                                   

             Dr.           Cr.                    Dr.        Cr.                      Dr.             Cr.

INTEREST ON CAPITAL    ………….              10,000                        ……………                5,000                                   15,000                      ……

 

 

Distributing the above         7,500          ………….                           7,500                     …………                              ……….                     15,000

 loss equally

  

               7,500   10,000        7,500         5,000               15,000 15,000                                                

 

Balance to be adjusted     2,500 (cr.)                        2,500 (dr.)                                 Nil

(net effect)

 

Q’S CURRENT A/C     Dr.       2500

       To P’s Current A/C                    2500

(Adjustment entry of omission passed)

 

 

 

 

 

ILLUSTRATION NO 2:

A and B are partners in a firm sharing profit and losses in the ratio of 3:2. Following was the balance sheet of the firm as at 31st March,2021.

 

Liabilities                                 Assets

                                             Sundry Asset                           80,000                                                                

Capital a/cs

A                          60,000

B                           20,000

 

 


                             80,000                                             80,000

 

Profit Rs. 30,000 for the year ended 31st March,2021 was divided between the partners without giving interest on capital @12% p.a. and salary to A @ Rs. 1000 per month. During the year a withdrew Rs. 10,000 and B Rs. 20,000.

Pass necessary Adjustment Journal Entry and show your working clearly.

 

First of all you have to check is it an error or omission?

We have not given interest on capital and we have not given salary. So we forgot to provide interest on capital and so clearly  this is an omission.so just give those directly.

 

But here we don’t have OPENING CAPITAL.

CLOSING CAPITAL is given in the balance sheet.

So firstly we need to calculate the opening capital so that we can provide interest on capital.

 

Calculation of OPENING CAPITAL

 

                                        A                                      B

Closing capital            60,000                              20,000

Add               

Drawings                      10,000                              20,000

 

Less

Profit                              18,000                              12,000 

 

OPENING CAPITAL       52,000                             28,000                        

                                        ADJUSTMENT TABLE

              A’s capital A/C            B’s capital A/C                         Firm

PARTICULARS                 Dr.                     Cr.                            Dr.                                 Cr.                                        Dr.                              Cr.   

 

Interest on cap       ……………….                     6,240                                  …………….                    3,360                                      9,600                                .......

Salary to A              ………………                  12,000                              …………..                      ………                                      12,000                             ………

Loss to be debited    12,960                         ………….                            8,640                              ………                                     ………..                               21,600

(3:2)                           12,960                              18,240                          8,640                                3,360                                       21,600                          21,600

Net effect                                                   5,280 (Cr.)                                                                 5,280 (Dr.)                                                                      NIL

Interest on capital calculation:

A    =   52000*12/100 = 6,240

B    =    28000*12/100 = 3,360

Adjustment Entry

B’s capital a/c   Dr.  5,280

      To A’s capital a/c           5,280

(interest on capital and salary was not provided, now adjusted)

 

Illustration no. 3

X, Y and Z are partners in a firm sharing profit and losses in the ratio of 5:3:2. Their fixed capitals were 3,00,000, 2,00,000 and 1,00,000. For the year ended 31st March,2021, interest on capital was credited to them 10% p.a. instead of 8% p.a. Showing your working clearly pass the adjustment entry.

                                    Adjustment Table

 Particulars x’ s current a/c                   Y’s current a/c                   Z’s current a/c                                      Firm

            Dr.                Cr.                   Dr.            Cr.                    Dr.                   Cr.                      Dr.                 Cr.             Interest on

Capital

 wrongly

credited

 now

 reversed    30,000                   …………                  20,000             ………….                    10,000                    ……………….                 ……………..             60,000

int on cap

should be

credited                                      24,000                                            16,000                                                     8,000                           48,000                     …………                ………..

profit                                            

credited to

 


partners

in 5:3:2           …………..               6,000                    …………..            3,600                       ………….                  2,400                            12,000                  ………

 


TOTAL 30,000        30,000       20,000      19,600          10,000         10,400            60,000     60,000

 


NET EFFECT            ………..                   400 Dr.                          400 Cr.                                    ………

 

 Note:     Low Rate of Interest on capital will increase the profit of the firm by (60,000-48,000) 12,000 which will be distributed among partners.

 

 

 

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