Introduction
In this article we will learn about the adjustment for personal Expenses of partner, wrongly debited to firm's profit and loss account.
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.
Meaning of Personal Expenses
- Let's first understand the meaning of personal expenses of partner. Personal expenses means expenses incurred by partner to meet his personal and family needs. Few examples of personal expenses are
- Expenses on purchasing food for self and family like purchasing vegetables, groceries, milk, cooking gas, etc.
- Expenses on Children education like purchasing books, stationary and uniform, payment of school fees, etc.
- Expenses on paying house rent for family to live in.
- Medical expenses for family like purchasing medicines, payment of hospital bills, etc when any family member gets ill.
You need to understand that, these expenses are not incurred to run the business of the partnership firm. These are personal expenses for running the family and hence are personal expenses of the partner.
Nature of Personal Expenses
Such Expenses are basically Partner Drawings. Partners withdraw money regularly from firm to meet such expenses. Such expenses will reduce the partner capital account balance.
How adjustment given in the question
- Expenses debited in the profit and loss account includes Rs 2000 paid for B (a partner) personal expenses
Please note that this adjustment can be given for any of the partner in the question. Let's understand how to do this adjustment.
Understand the adjustment
These are personal expenses of the partner. These are not the partnership firm's business expenses. But by mistake the personal expenses of the partner, are debited to partnership firm profit and loss account.
How to correct this mistake?
We will debit partner capital account as partner has taken money from firm to meet personal expenses. This will decrease his capital account balance. Next we will reverse the expenses debited to firm profit and loss account, as these are not firm's business expenses. Due to reversal of firm expenses there will be profit.
Journal Entry
- Partner Capital A/c Dr.. Rs 2000
- To Revaluation A/c Rs 2000
Partner Capital account is decreasing, so it gets debited. Partnership Firm's expenses are decreasing, hence there will be revaluation profit and so revaluation account gets credited.
Treatment in Revaluation Account
| Particulars | Amount | Particulars | Amount |
| By Partner Capital A/c | 2000 |
Since there is a profit of Rs 2000, so it will be shown on credit side of revaluation account.
There will be no entry on the debit side of revaluation account.
Treatment in Partner Capital A/c
| Particulars | A | B | Particulars | A | B |
| To Revaluation A/c | 2000 |
It will be shown on the debit side of capital account of the partner who has made the drawings. There will be no entry on the credit side.
Treatment in Balance Sheet
| Liabilities | Amount | Assets | Amount |
There will be no impact in the balance sheet either on assets side or the liabilities side due to this adjustment.
Finally
That's all for this adjustment. Please go through below links for more partnership accounts adjustments on reconstitution.
