Liability Write Back- Partnership Adjustments Part 9

Introduction

In this article we will learn about the adjustment for 'Liability Write Back' in partnership accounts.

Please note that the adjustment will be done in a similar manner whether you are doing admission, retirement, death or change in profit ratio question. You need not understand the adjustments separately for these chapters.

How are Liabilities created

To understand how are liabilities created in accounts, we will take a few examples.

• Goods purchased on credit.
  • Journal entry will be Purchases account debit and Sundry creditors account credit.
    • Here purchases is an expense and sundry creditors is a liability
• When the partnership firm determines that it has a liability to pay rent ,
  • Journal entry will be Rent expenses debit and outstanding rent account credit
    • Here Rent is an expense and outstanding rent is a liability.
• Suppose a court case is going on against partnership firm and firm determines it may be required to pay a compensation under the court case.
  • Journal entry will be Compensation expense account debit and provision for compensation account gets credited.
    • Here compensation is an expense account and provision for compensation is a liability account
• Partnership firm makes a provision for warranty expenses.
  • Journal entry will be warranty expenses account debit, and Provision for warranty expense account credit.
    • Here Warranty is an expense account, and provision for warranty is a liability account

In all the above examples of creating a liability that we have seen above two key observations come out. First , expenses are increased and hence debited. Second, liability is increased and hence credited. The expense account is closed at year end by transferring to profit and loss account for the year. The liability account is shown in balance sheet every year till it is paid.

Liability write back meaning

Above we discussed how liabilities are created in books of accounts. If due to some reason, now the firm need not pay the liability created earlier, then the firm has to remove the liability from its balance sheet. Removing the liability from the balance sheet means the value of liability is to be made Nil in the books of accounts. This is known as write back of liability. Journal entry for liability write back we will discuss later.

Liability write back Reasons

• There could be several reasons for non payment of liability created earlier.
  • Liability was wrongly created earlier by mistake
  • Earlier excess liability was created than was actually required.
  • Some court decision has reduced the liability made earlier.
  • There can be some other reason due to which the liability is not to be paid now.

Meaning of write back

"Write-back" means reversing the original entry that created the liability. This involves debiting the liability account and crediting the original expense account.

But if the write back happens in any subsequent financial year, then expense account cannot be credited. This is because the expense account was already closed, by transferring to profit and loss account of earlier year. We need to credit some other account instead of expense account.

Write back of liability on Reconstitution

If the write back happens at the time of firm's reconstitution, like admission or retirement of a partner then we will credit revaluation account in place of expense account. Our journal entry will become

• Liability A/c Dr..
  • To Revaluation A/c

We will discuss more about it later on.

How Liability write back adjustment given in the question

Now that we have understood the meaning of write back of a liability, lets come to how such adjustments are written in the question.

• Rs 5000 included in creditors is not likely to be claimed and to be written back
• Creditors were written back by Rs 5000.
• Creditors included a liability of Rs 7000 which is decided by court at Rs 2000
• Creditors include Rs 5000 which is not to be paid.
• A Liability of Rs 5000 included in creditors is not likely to arise.
  • Not likely to arise means not to be paid.

Liability Write back Journal Entry

• Respective Liability A/c Dr.. Rs 5000
  • To Revaluation A/c Rs 5000

Liability will be reversed. Decrease in liability is debited. So Liability account gets debited.

As discussed earlier, the firm is not to make payment for this liability. This gives rise to revaluation gain, so revaluation account gets credited.

Here you should understand that suppose you have to give money to someone earlier, but now you need not pay, then you stand to gain.

Liability write back in Revaluation Account

Since there is a profit, so it will be shown on credit side of revaluation account. On the credit side we will write, By Liability Account. Remember in examination question replace the word "liability" by the type of liability as given in the question.

There will be no entry on the debit side of revaluation account

Liability write back in Partner Capital A/c

There will be no impact in partner capital account as we have not passed any entry in partner capital account

Liability Write back in Balance Sheet

In the balance sheet the value of the respective liability as per question will be reduced. If it is creditors then reduce the amount as per adjustment from creditors. If it is some provision then reduce the amount of provision. Or if it is bills payable then reduce the amount of bills payable by the amount of adjustment.

Finally

Here is the summary of the whole adjustment.

That's all for this adjustment. Please go through below links for more partnership accounts adjustments on reconstitution.

Partnership Accounts Index