What are Past Adjustments
Past adjustments refer to corrections made to the accounts of a partnership for past transactions that were not properly recorded or recognized at that time. These adjustments are necessary to reflect the true financial position and performance of the partnership.
In previous classes we have studied the chapter rectification of errors. Past Adjustments in partnership is similar to rectification of errors. However here we usually rectify the errors or omissions in appropriation of profits only.
These are called 'Past' as the errors were made in one or more previous financial years and will be corrected in the current period through an adjustment entry.
Types of mistakes covered in past adjustments
- Omission - Some appropriaton like interest on capital, salary, etc was to be made but the firm forgot to make such appropriation
- Error Type 1 - Appropriation made at an incorrect rate. Example salary payable at Rs 2000 per month but wrongly paid at Rs 3000 per month or Interest on capital paid at 5% instead of 6%
- Error type 2 - Some appropriation was not to be made but firm wrongly made the appropriation. Example Commission paid to a partner but it was not payable
Methods of doing Past Adjustments
- By passing separate entries for rectifying each error or omission
- By passing a single adjustment entry for all the errors or omissions. In this case we prepare an adjustment table for consolidating the net impact of all the errors and omissions
How Past adjustments done
Interest on Capital
Interest on capital is the return partners receive on the capital they have invested in the partnership. It is calculated based on the interest rate as per partnership agreement. It is always calculated on the opening capital of the partners (Capital at the beginning of the financial year). Past adjustments for interest on capital may be necessary if:
- Omission - Interest was not paid for previous accounting periods but was payable as per agreement
- Error Type 1 - The interest rate or calculation method was incorrect.
- Error Type 2 - The interest was not payable as per agreement but was wrongly paid
To rectify such errors, adjusting entries are made to recognize the appropriate interest expense and update the partners' capital accounts accordingly.
Salary or Remuneration
Partners may receive salaries for their involvement in the partnership's operations, especially if they play an active role in management. Past adjustments for salaries might be needed if:
- Omission - Salary was not paid for previous accounting periods but was payable as per agreement
- Error Type 1 - The Salary paid was incorrect.
- Error Type 2 - The salary was not payable as per agreement but was wrongly paid
Adjusting entries are made to recognize the correct salary expenses and update the partners' capital or drawings accounts accordingly.
Commission
Partners may also receive commissions for specific services they provide to the partnership, such as generating sales or securing contracts. Past adjustments for commissions may be necessary if:
- Omission - Commission was not paid for previous accounting periods but was payable as per agreement
- Error Type 1 - The Commission paid was incorrect.
- Error Type 2 - The Commission was not payable as per agreement but was wrongly paid
Adjusting entries are made to recognize the correct commission expenses and update the partners' capital or drawings accounts accordingly.
Interest on Drawings
Interest on drawings is paid by partners to firm if they withdraw their profit share in advance before close of accounting period. It is calculated based on the interest rate as per partnership agreement. It is always calculated on the total drawings of each partner during the year. Past adjustments for interest on drawings may be necessary if:
- Omission - Interest was not charged for previous accounting periods but was chargeable as per agreement
- Error Type 1 - The interest rate or calculation method was incorrect.
- Error Type 2 - The interest was not chargeable as per agreement but was wrongly charged
To rectify such errors, adjusting entries are made to recognize the appropriate interest income and update the partners' capital accounts accordingly.
Profit Distribution
After allocating interest on capital, salaries, and commissions, the remaining profits are distributed among the partners based on their profit-sharing ratios. Past adjustments for profit distribution may be required if:
- Omission - Profits were not distributed at all
- Error Type 1 - The profits were distributed in an incorrect ratio
- Error Type 2 - The profits were distributed but were not distributable as per agreement
Adjusting entries are made to correct any errors in profit distribution and update the partners' capital or drawings accounts accordingly.
Journal Entries for rectification
When Separate entry made for each error or omission
Journal entry for Interest on Capital/Salary/Commission/share of profit will be same as follows.
- Omission -
- Profit and Loss Adjustment A/c Dr..
- To Partner Capital/Current A/c
- Error Type 1 -
- Partner Capital/Current A/c Dr..
- To Profit and Loss Adjustment A/c
- (with incorrect interest/salary/commission)
- Profiit and Loss Adjustment A/c Dr..
- To Partner Capital/Current A/c
- (With correct interest/Salary/Commission)
- Error Type 2 -
- Partner Capital/Current A/c Dr..
- To Profit and Loss Adjustment A/c
- (With incorrect Interest/Salary/Commission)
Journal entry for Interest on drawings/share of loss will be exactly opposite of the above entries for interest/salary/commission/share of profit and hence are not written again here.
After passing all the rectification entries the balance in he Profit and loss Adjustment A/c will be transferred to partner capital/current A/c in their profit sharing ratio
When adjustment done through single adjustment entry
In such case an adjustment table is prepared to consolidate the net impact of all the errors and omissions
Format of Preparing the Adjustment Table
Past Adjustments format by Samridhh Fin CoachHow entries are made in adjustment table
| Type of appropriation | Type of error | Nature | Adj in Partner cap column | Adj in firm column |
| Interest on Capital/Salary/Commission | Omission | Credit each partner | Debit with total interest for all partners | |
| Error Type 1 | Wrong amount | Debit each partner | Credit with total amount for all partners | |
| Correct amount | Credit each partner | Debit with total amount for all partners | ||
| Error Type 2 | Wrong amount | Debit each partner | Credit with total amount for all partners | |
| Interest on Drawings | Omission | Debit each partner | Credit with total amount for all partners | |
| Error Type 1 | Wrong amount | Credit each partner | Debit with total amount for all partners | |
| Correct amount | Debit each partner | Credit with total amount for all partners | ||
| Error Type 2 | Wrong amount | Credit each partner | Debit with total amount for all partners | |
| Profit distributed in wrong ratio | Debit each partner | Credit with total amount for all partners | ||
| Loss distributed in wrong ratio | Credit each partner | Debit with total amount for all partners |
Note : Entries are made in adjustment table only if profits or losses are distributed in wrong profit sharing ratio. If it was omitted then no entry need to be made in the adjustment table as it will automatically get adjusted in the next step
After making all the entries in adjustment table as above find the difference between debit and credit in the firm column. Write the difference amount on the lower side (debit or credit in firm column) and distribute the same in partner capital in the correct profit sharing ratio and write on the opposite side of where written in adjustment table.
Example - Suppose after all entries firm column has total debit of Rs 100000 and total credit of Rs 80000. The difference of Rs 20000 will be written on the credit side in firm column and the same will be distributed in correct profit sharing ratio and written on the debit side of partner capital columns.