Past Adjustments in Partnership Accounting | Cases & Examples
Last Updated : 21 Apr, 2025
In a Partnership, the profit is divided among partners according to the conditions mentioned in the partnership deed. For example, according to the conditions of the Partner's Salary, Interest on Capital, etc. Even though there are conditions, sometimes partners forget to fulfil them or make some errors in fulfilling these conditions. Past Adjustments are made to correct all the errors made in the partnership accounting. Some of these errors are as follows:
- Interest not given on partner's loan
- Interest on capital wrongly calculated or not paid
- Wrong profit-sharing ratio
- Interest on drawings not charged or charged at the wrong rate
- Salary or commission paid to a partner without considering whether or not the partner is entitled to it
Because of the above-mentioned errors, the profits are wrongly distributed among the partners. Hence, it becomes necessary to adjust this through the capital accounts before or after the closure of accounts.
Adjustments before Closing Accounts:
Sometimes a company finds errors before the accounts are closed. The adjustment of such errors is made before the closure of accounts.
Adjustments after Closing Accounts:
Sometimes a company finds after the closure of accounts that any condition provided for in the partnership deed has not been fulfilled or a mistake has been made. In these situations, the company does not reopen the accounts in the following year to rectify the mistake or error instead adjustment entries are passed through the partner's capital accounts. Before passing the adjustment entries, it has to determine which partner has received an extra share of profit and which partner has received less. Ultimately, the account of partner who has received an extra amount is debited, and the account of partner who has received a less amount is credited.
Steps for the Calculation of Amount of Past Adjustment Entry
The steps are as follows:
Step 1: The first step is to determine the amount which should have been credited by way of interest on capital, salary, commission, share of profit, etc.
Step 2: In the second step, the amount already credited by way of interest on capital, salary, commission, share of profit, etc., is calculated.
Step 3: The next step involves calculation of the difference between the amounts calculated in the above two steps.
Step 4: After calculating the difference, the company has to find out which partner has received excess and which partner has received short.
Step 5: The last step of calculation of amount of adjustment entry involves passing the adjusting journal entry by debiting the Capital A/c of the partner who has received excess amount and crediting the Capital A/c of the partner who has received short.
Case 1: When Interest on Capital is less Charged:
Example:
Gaurav, Kashish, and Vaibhav are partners in a firm sharing profits and losses in the ratio of 2:3:1. Their fixed capitals were ₹6,00,000; ₹2,00,000 and ₹4,00,000, respectively. Interest on capital for the year 2020-21 was credited to them @ 9% p.a. instead of 10% p.a. The profit for the year after charging interest was ₹5,00,000. Prepare the Adjustment Table and pass the Adjustment Entry.
Solution:
Case 2: When Interest on Capital is more Charged:
Example:
Sahil, Vishal, and Anand are partners in a firm sharing profits and losses in the ratio of 2:1:2. Their fixed capitals were ₹3,00,000; ₹6,00,000, and ₹12,00,000, respectively. Interest on capital for the year 2020-21 was credited to them @ 10% p.a. instead of 8% p.a. The profit for the year after charging interest was ₹6,00,000. Prepare the Adjustment Table and pass the Adjustment Entry.
Solution:
Case 3: When Interest on Capital is not Charged:
Example:
Sukant and Bijay are partners in a firm sharing profits and losses in the ratio 3:5. Their fixed capitals were ₹10,00,000 and ₹18,00,000, respectively. After the closing of accounts of the year, it was found that interest on capital @10% p.a. as provided in the partnership deed has not been credited to the Capital Accounts of the partners. Pass a necessary journal entry to rectify the error.
Solution:
Case 4: When Interest on Drawings is not Charged:
Example:
Akanksha, Sayeba, and Nupur are partners in a firm sharing profits and losses in the ratio 3:2:1. After the final accounts of the firm have been prepared, it was discovered that interest on drawings had not been taken into consideration. The interest on drawings of the partners was ₹500, ₹350, ₹200, respectively. Pass a necessary journal entry to rectify the error.
Solution:
Case 5: When Profit is already distributed in deed ratio without adjustment of Interest on Capital, Salary, Commission, and Interest on Drawings:
Note: If Profit is given then it is taken on Adjustment.
Example:
The net profit of a firm for the year ended 31st March 2020 was ₹1,20,000, which has been duly distributed amongst its partners Hardik, Sumit, and Shubham in their agreed proportions of 2:1:1, respectively. It was discovered on 10th April 2020 that the undermentioned transactions were not passed through the books of accounts of the firm for the year ended 31st March 2020, which stood duly closed on that date:
- Interest on Capital @ 10% p.a.
- Interest on Drawings: Hardik ₹1,400; Sumit ₹1,000; Shubham ₹600.
- Salary of ₹20,000 to Hardik and ₹30,000 to Sumit.
- Commission due to A on a special transaction, ₹12,000
The capital accounts of the partners on 1st April 2019 were: Hardik ₹1,00,000; Sumit ₹80,000; Shubham ₹60,000. Suggest a journal entry that should be passed on 10th April 2020 that will not affect the Profit & Loss Account of the firm for 2019-20 and at the same time rectify the position of the partners.
Solution:
Case 6: When Profit already distributed in wrong ratio without adjustment of Interest on Capital, Salary, Commission, and Interest on Drawings:
Example:
Ishika, Harshita, and Astha are partners in a firm with capital as ₹1,20,000; ₹60,000; and ₹60,000, respectively on 1st April 2021. As per the provisions of the deed:
- Astha was to be allowed a remuneration of ₹12,000 p.a.
- Interest at 5% p.a. was to be provided on capital.
- Profits were to be divided in the ratio of 3:1:1.
Ignoring the above terms, net profit of ₹72,000 for the year ended 2021-22 was divided among the partners equally. Prepare the Adjustment Table and pass an Adjustment Entry to rectify the error.
Solution:
Case 7: Computation of Opening Capital (When Interest on Capital is not Given):
Example:
Anshul, Abhinav, and Navya are partners in a firm sharing profits and losses in the ratio of 2:3:5. After division of the profit for the year ended 31st March 2022 their capitals were ₹1,00,000; ₹1,20,000; and ₹1,40,000. During the year, they withdraw ₹40,000 each. The profit of the year was ₹40,000. The partnership deed provided that interest on capital will be allowed @10% p.a., but while preparing the final accounts interest on partners' capital was not allowed. Calculate the capital of Anshul, Abhinav, and Navya on 1st April 2021 and pass the necessary journal entry for providing Interest on Capital.
Solution:
Case 8: Changes in Profit Sharing Ratio:
Example:
Nisha, Shreya, and Kanika were three partners in a firm sharing profits and losses in the ratio 1:3:4, respectively. Nisha wants that she should share equally in the profit with Shreya and Kanika, and she further wants that the change in profit-sharing ratio should come adjustment into effect, respectively for the last three years. Shreya and Kanika have no objection to this. The profit for the last three years were ₹10,000, ₹12,000 and ₹14,000. Show the adjustment of profit for the last three years with the help of journal entries.
Solution:
Working Notes:
Total Profit of the last 3 years = 10,000 + 12,000 + 14,000
= ₹36,000
Case 9: When Partnership Deed is not maintained:
Example:
The capitals of Sabyasachi, Dharmendra, and Rishab as on 31st March 2021 amounted to ₹60,000; ₹2,20,000; and ₹4,40,000, respectively. The profits for the year 2020-21 was ₹1,20,000 and was distributed in the ratio 3:2:1 after allowing Interest on Capitals @ 10% p.a. During the year, each partner withdrew ₹80,000. The partnership deed was silent as to profit sharing ratio but provided for Interest on Capital @ 12%. Pass the necessary adjustment journal entry.
Solution:
Working Notes:
Calculation of Interest on Capital already provided and Opening Capitals:
Case 10: Adjusting Entry when Manager is treated as a Partner:
Note: Revised profit for calculation Share of Profit = Given Profits + AMount already given as Manager - Amount to be given as Partner
Example:
Arun and Anurag are partners sharing profits and losses in the ratio of 5:4. They employed Bhavook as their manager to whom they paid a salary of ₹1,500 per month. Bhavook has deposited ₹40,000 on which interest was payable @9% p.a. At the end of 2020-21 (after division of the year's profits), it was decided that Bhavook should be treated as a partner with effect from 1st April 2017-18 with 1/6th share of profits, his deposit being considered as capital carrying interest at 6% p.a. like capitals of other partners. The firm's profits and losses after allowing interest on capitals were: 2017-18 Profit ₹1,18,000; 2018-19 Profit ₹1,25,200; 2019-20 Loss ₹8,000; 2020-21 Profits ₹1,56,000. Record the necessary Journal Entries to give effect to the above.
Note: Interest on Capital is to be allowed as a charge
Solution:
Share of Bhavook as a partner is ₹82,800, which is more than ₹57,600; i.e., ₹25,200. Therefore, Bhavook will be credited with ₹25,200, and Arun & Anurag will be debited in 5:4 ratio with ₹25,200.
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PART-A
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Chapter 4: Reconstitution of a Partnership Firm: Retirement or Death of a Partner
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3 min read
Chapter 5: Dissolution of Partnership Firm
Difference between Dissolution of Firm and Dissolution of PartnershipA Partnership is an association of two or more people to conduct business. A Partnership is a relation between persons who agreed to share the profits of a business carried on by all or any of them acting for all. Partners are someone who is associated with another in a common activity or interest,
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Difference between Firm's Debt and Private DebtDebt is a liability that necessitates one party, the debtor, to pay another party, the lender, money or other consented value. Debt is a delayed payout, or set of payments, as opposed to an instant rebate. It is an important concept in the context of business finance and accounting. The separate ent
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Difference between Realisation account and Revaluation accountWhat is Realisation Account?At the time of dissolution of the Partnership firm, Assets are realised, outside liabilities are paid, loan by partner is repaid and the balance, if any, is distributed among the partners. Realisation account is prepared to close the books of accounts by realising assets
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Accounting treatment of Accumulated Profits, Reserves, and Losses in case of Dissolution of FirmAccumulated profit refers to a part of the firm's net profit that is preserved by the firm for future growth. It is also known as retained earnings or undistributed income. Accumulated profits and reserves show the financial position of the company in the long run in terms of earning, saving, and in
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Dissolution of Firm: Partner's Capital AccountWhat is Dissolution of a Firm?Dissolution of the firm is the discontinuation of the business and closure of all the books of accounts of the firm. Dissolution of the partnership means a change in the profit-sharing ratio of the existing partners in the firm and the business or the firm continues its
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Dissolution of Partnership Firm: Meaning and ExampleWhat is Dissolution of a Partnership Firm?Dissolution of the firm means dissolution of the partnership among the partners of the firm. The business is closed, and an end comes to the business relationship among partners on the dissolution of the firm. The firm is dissolved either by a court order or
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Accounting Treatment of Goodwill in case of Dissolution of FirmGoodwill is nothing but a monetary value of a reputation of a business firm in the market, earned by the firm by serving its customers. In a Partnership firm, Goodwill is treated like an asset; every partner has a right over the firm's goodwill up to his/her share in the business.In case of the Diss
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Accounting Treatment of Joint Life Policy in case of Dissolution of a FirmWhat is Joint Life Policy?Joint Life Policy is a life policy that gives coverage against the death of the policyholder, under which the coverage is of a minimum of two persons and the pay-out is on a first-death basis. Since the Partnership firm is a business run by at least two people, the partners
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Accounting Treatment of Contingent Assets and Contingent Liabilities in case of Dissolution of a firmContingent Assets: A Contingent Asset is an economic gain that may come into existence in near future as a result of some past action. The existence of such assets is completely uncertain and beyond the control of the entity. Example: Any property of a firm under some legal suit, and warranty receiv
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Part-B
Chapter 1: Accounting for Share Capital
Company and its TypesA company is one of the most important and prominent forms of business organization. It can be described as a voluntary association of individuals, having a common purpose, who agree to pool their funds and unite to achieve the said goals. It can be called an artificial person created under the juri
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Shares : Meaning, Nature and TypesWhat are Shares?When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above
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Difference between Preference Shares and Equity SharesLife-blood of any business is finance. Sufficient finance for the company helps to grow and expand the company. The financial needs of any business are concerned with the acquisition and utilisation of funds. It is done through planning, acquiring, utilising, managing, and controlling funds in conne
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Share Capital: Meaning, Kinds, and Presentation of Share Capital in Company's Balance SheetWhat are Shares?When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above
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Difference between Capital Reserve and Reserve CapitalCapital Reserve and Reserve Capital are most often confused same. However, the former is a reserve created out of the Capital Profits of a firm; whereas, the latter is a part of the increased nominal capital or uncalled share capital of an organisation which shall not be called up, except in the eve
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Accounting for Share Capital: Issues of Shares for CashA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Issue of Shares At Par: Accounting EntriesA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Issue of Shares at Premium: Accounting EntriesA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Issue of Share for Consideration other than Cash: Accounting for Share CapitalA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Issue of Shares: Accounting Entries on Full Subscription with Share ApplicationA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Calls in Arrear: Accounting Entries with Examples on Issue of SharesCalls in Arrear refer to the amount of money that a shareholder has not yet paid to a company on shares they have agreed to purchase. In the context of a company issuing shares, the payment for these shares is often requested in installments, known as "calls." If a shareholder does not pay an instal
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Calls in Advance: Accounting Entries with Examples on Issue of SharesCalls in Advance is the amount of future calls which is received by the company in advance. Calls in Advance is just opposite to Calls in Arrear. It is a situation when the shareholders of a company pay the amount not yet called upon their shares. Section 50 of the Companies Act, 2013 says that the
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Oversubscription of Shares: Accounting TreatmentA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Oversubscription of Shares: Pro-rata AllotmentA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Oversubscription of Shares: Pro-rata Allotment with Calls in ArrearA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Forfeiture of Shares : Accounting Entries on Issue of SharesWhat is Forfeiture of Shares?Cancellation of shares of a shareholder who fails to pay the amount due on allotment or on any call within the specific time period is known as Forfeiture of Shares. A company or its directors can forfeit the shares only if its Articles of Association allow for the same.
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Accounting Entries on Re-issue of Forfeited SharesA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Disclosure of Share Capital in the Balance Sheet: Accounting Entries on Issue of SharesA unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
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Chapter 2: Issue and Redemption of Debentures
Issue of Debentures: Meaning, Characteristics, Purpose of Issuing Debentures and ExampleA debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued and traded in the ca
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Types of DebenturesWhat is Debenture?A debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued an
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Difference between Shares and DebenturesIssuing of Shares and Debentures are two of the most prominent source of finance for any business. By issuing shares and debentures, any public company can generate finance from the market. Finance required by the business to establish and run its operations is known as Business Finance. No business
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Issue of Debentures: Accounting Treatment of Issue of Debenture and Presentation of debentures in balance sheet (with format)What is a Debenture?A written instrument or document which is issued by the company acknowledging the borrowings is known as Debenture. In this document, the terms of repayment of principal and payment of interest at a specific rate are stated. According to Section 2(30) of the Companies Act, 2013,"
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Issue of Debenture at Par and PremiumWhat is a Debenture?A written instrument or document which is issued by the company acknowledging the borrowings is known as Debenture. In this document, the terms of repayment of principal and payment of interest at a specific rate are stated. According to Section 2(30) of the Companies Act, 2013,"
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Issue of Debentures for Consideration other than CashIssue of Debentures for consideration other than cash means that the company has not received amount (in cash or by cheque) against the debentures issued. Debentures may be issued for consideration other than cash in the following situations:To promoters of the company for rendering services for inc
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Issue of Debenture as Collateral SecurityWhat is Issue of Debentures as Collateral Security?A company may have to issue debentures as a subsidiary or secondary security in addition to the principal security when it takes a loan from a bank or from other party, this is known as Issue of Debentures as Collateral Security. Collateral security
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Interest on DebenturesA debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued and traded in the ca
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Redemption of DebenturesWhat is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
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Redemption of Debentures: Meaning, Sources and Rules regarding RedemptionWhat is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
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Redemption of Debentures in case of Lump-SumWhat is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
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Redemption of Debentures in case of InstallmentWhat is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
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Redemption of Debentures in case of Purchase of Own DebenturesWhat is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
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