Past adjustments in partnership accounts, explained step by step

Interest on capital omitted, salary left out, profit shared in the wrong ratio? Here is the table method for past adjustments, with the single adjusting entry.

Past adjustments are among the most-asked questions in Chapter 1 of Class 12 Partnership. The situation: the accounts of a year have been closed, and then someone notices an error — interest on capital was not allowed, a partner's salary was left out, or profit was distributed in the wrong ratio. The capitals are fixed, so instead of reopening the accounts we pass one adjusting entry.

The table method

Make a table with one column for each partner and a column for the firm.

• Step 1. Show what each partner should have been credited: interest on capital, salary, commission and so on.
• Step 2. Reverse the effect of the omission on profit: the items in Step 1 reduce the divisible profit, so debit each partner's share of that total in the profit-sharing ratio.
• Step 3. If profit was distributed in the wrong ratio, reverse the wrong distribution and credit the correct one.
• Step 4. Net each column. A partner with a net credit has gained less than due; a partner with a net debit has gained more.

The adjusting entry

The partner with the net debit is debited and the partner with the net credit is credited:

Under the fixed capital method, use Current Accounts; under the fluctuating method, use Capital Accounts.

Common mistakes

• Forgetting that interest on drawings also has to be adjusted when it was omitted.
• Using the new ratio instead of the ratio of the year being corrected.
• Passing a separate entry for every item instead of the single net entry.

In our recorded lectures this topic is covered in Class 7, Class 8 and Class 13 of the Partnership chapter, with comprehensive questions. Enrolled students can watch them in the student portal.