Accountancy

Class XII

Chapter- Accounting for Partnership Firms (Fundamentals)

th
1 Period (13 April)

Adjustments in closed Accounts. OR Past Adjustments.

Sometimes in partnership firms the books of accounts get closed but some mistakes or omissions take place. Thus, to rectify
those errors and omissions adjustment entries are passed.

The errors or mistakes are on account of the following-

1. Divisible Profit wrongly distributed.

2. Certain Appropriations (IOC, Salary, Bonus and Commission) omitted or wrongly dealt (excess charged or short
charged).

3. Interest on Drawings omitted or wrongly dealt. (Excess or Short)

Let’s deal with them one by one-

1. Divisible Profit wrongly distributed. - Share of profit is always credited to partners’ capital account.

Now as per the rule of rectification – Excess debit should be credited, Excess credit should be debited,

Short debit should be debited, Short credit should be credited.

As we know that the profit which was distributed is wrong, we debit it in partners’ capital in the wrong ratio and then
after we credit the profit in the correct PSR in partners’ capital account.

Then the difference between the debit and the credit should be used to pass the adjustment entry.

Example- A and B are partners with PSR 3: 2. The divisible profit of the firm Rs. 200000 was distributed equally by
mistake. Pass an adjustment entry to rectify.

Solution-

Particulars A B
1. Wrongly distributed profit Rs. 200000 equally (1:1) 100000 Dr 100000 Dr
2. Correct distribution of profit Rs. 200000 (3:2) 120000 Cr 80000 Cr
Difference of 1 & 2 20000 Cr 20000 Dr
We see that A has a credit balance of Rs. 20000 and B has a debit balance of Rs. 20000.

Adjustment Entry will be-

B’s Capital A/c ------------------- Dr 20000

To A’s Capital A/c--------------------------20000

Example- X and Y are partners in a firm and there was no partnership agreement. The profit of the firm Rs. 320000
was distributed among X and Y in the ratio 7:3 as X had invested greater capital. Is the treatment correct and if no
show the adjustment entry?

Solution-
Particulars X Y
1. Wrongly distributed profit Rs. 320000 (7:3) 224000 Dr 96000 Dr
2. Correct distribution of profit Rs. 320000 (1:1) 160000 Cr 160000 Cr
Difference of 1 & 2 64000 Dr 64000 Cr
We see that X has a debit balance of Rs. 64000 and Y has a credit balance of Rs. 64000.

Adjustment Entry will be-

X ’s Capital A/c ------------------- Dr 64000

To Y’s Capital A/c--------------------------64000

3. Certain Appropriations (IOC, Salary, Bonus and Commission) omitted or wrongly dealt (excess charged or short
charged)- Amount of Appropriation is always credited to partners’ capital account.

a- In case of omission of appropriation- The amount of IOC is first credited to partners capital account and
then after this will reduce the divisible profit, so the share of profit is calculated as per PSR and then
debited to partners capital account. Then after the difference between the two is used to pass adjustment
entry.

Example- A and B were partners in a firm sharing profits equally. Their fixed capitals were Rs. 1,00,000 and
Rs. 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate of 10% per annum.
For the year ended the profits of the firm were distributed without providing Interest on Capital.

Solution-
Particulars A capital/ current a/c B capital/current a/c P/L App (Firm)
1. Interest on Capital (10% PA) 10000 Cr 5000 Cr 15000 Dr
2. Divisible Profit as per PSR (1:1) 7500 Dr 7500 Dr 15000 Cr
Difference of 1 & 2 2500 Cr 2500 Dr ---------------
We see that A has a Credit balance of Rs. 2500 and B has a debit balance of Rs. 2500.

Adjustment Entry will be-

B’s Capital A/c ------------------- Dr 2500

To A’s Capital A/c--------------------------2500

b- In case the appropriation is less (short) charged- We need to calculate the amount which is short and then
credit it to partners’ capital account. This will reduce the divisible profit, so the share of profit is calculated
as per PSR and then debited to partners’ capital account. Then after the difference between the two is used
to pass adjustment entry.

Example- A and B were partners in a firm sharing profits equally. Their fixed capitals were Rs. 1,00,000 and
Rs. 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate of 10% per annum
but it was calculated @ 8 % PA. Pass necessary adjustment entry to rectify the error?

Solution-

Particulars A capital/ current a/c B capital/current a/c P/L App (Firm)

1. Interest on Capital (10-8=2%) 2000 Cr 1000 Cr 3000 Dr
2. Divisible Profit as per PSR (1:1) 1500 Dr 1500 Dr 3000 Cr
Difference of 1 & 2 500 Cr 500 Dr ---------------
We see that A has a Credit balance of Rs. 500 and B has a debit balance of Rs. 500.

Adjustment Entry will be-

B’s Capital A/c ------------------- Dr 500

To A’s Capital A/c--------------------------500

c- In case the appropriation is Excess (over) charged- We need to calculate the amount which is excess and
then debit it to partners’ capital account. This will increase the divisible profit, so the share of profit is
 calculated as per PSR and then credited to partners’ capital account. Then after the difference between the
two is used to pass adjustment entry.

Example- A and B were partners in a firm sharing profits equally. Their fixed capitals were Rs. 1,00,000 and
Rs. 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate of 10% per annum
but it was calculated @ 12 % PA. Pass necessary adjustment entry to rectify the error?

Solution-

Particulars A capital/ current a/c B capital/current a/c P/L App (Firm)

1. Interest on Capital (12-10=2%PA) 2000 Dr 1000 Dr 3000 Cr
2. Divisible Profit as per PSR (1:1) 1500 Cr 1500 Cr 3000 Dr
Difference of 1 & 2 500 Dr 500 Cr ---------------

We see that A has a debit balance of Rs. 500 and B has a credit balance of Rs. 500.

Adjustment Entry will be-

A’s Capital A/c ------------------- Dr 500

To B’s Capital A/c--------------------------500
d- In cases when two or more than two appropriations are dealt – We may discuss it by an example.

Example-

X, Y and Z are partners in a firm sharing profits in the ratio of 3: 1: 1. Their fixed capital balances are Rs.
4,00,000, Rs. 1,60,000 and Rs. 1,20,000 respectively. Net profit for the year ended 31st March, 2018
distributed amongst the partners was Rs. 1,00,000, without taking into account the following adjustments:

(a) Interest on capitals @ 2.5% p.a.

(b) Salary to X Rs. 18,000 p.a., commission to Y Rs. 12,000 and bonus to Z Rs. 16,000.

You are required to pass adjustment entry.

Solution-

Particulars X cap/curt a/c Y cap/curt a/c Z cap/ curt a/c P/L App (Firm)
1. Wrong profit distributed (100000 60000 Dr 20000 Dr 20000 Dr 100000 Cr
in the 3:1;1)
2. IOC @ 2.5% p.a. 10000 Cr 4000 Cr 3000 Cr 17000 Dr
3. Salary 18000 Cr ----------- ----------- 18000 Dr
4. Commission ----------------- 12000 Cr ------------- 12000 Dr
5. Bonus ------------ ------------- 16000 Cr 16000 Dr
6. Remaining profit shared in PSR 22200 Cr 7400 Cr 7400 Cr 37000 Dr
(100000 – 63000 = 37000)
9800 Dr 3400 Cr 6400 Cr ------------------
Difference of 1 and (2+3+4+5+6)
We see that X has a debit balance of Rs. 9800, Y has a credit balance of Rs. 3400 and Z has a credit balance of Rs.
6400.

Adjustment Entry will be-

X’s Capital A/c ------------------- Dr 9800

To Y’s Capital A/c--------------------------3400
To Z’s Capital A/c--------------------------6400
Practise Questions-

1. A, B and C shared profits in the ratio of 1: 2: 3. Profits for the last three years were Rs. 1,40,000, Rs. 84,000 and Rs.
1,06,000 respectively. These profits were by mistake distributed equally. The error is now to be corrected. Give the
necessary rectification Journal entry.

2. P and Q were partners in a firm sharing profits and losses equally. Their fixed capitals were Rs. 2,00,000

and Rs. 3,00,000 respectively. The Partnership Deed provided for interest on capital @ 12% per annum. For the year
ended 31st March, 2016, profits of the firm were distributed without providing interest on capital. Pass necessary
adjustment entry to rectify the error.

3. A, B and C were partners. Their fixed capitals were Rs. 60,000, Rs. 40,000 and Rs. 20,000 respectively. Their profit-
sharing ratio was 2: 2: 1. According to the partnership deed, they were entitled to interest on capital @ 5% p.a. In
addition, B was also entitled to draw a salary of Rs. 1,500 per month. C was entitled to a commission of 5% on the
profits after charging the interest on capital, but before charging the salary payable to B. The net profits for the year,
Rs. 80,000, were distributed in the ratio of their capitals without providing for any of the above adjustments. Showing
your workings clearly, pass the necessary adjustment entry.

4. A, B and C were partners in a firm sharing profits and losses in the ratio of 3: 3: 4.

On 1.4.2017 the balances in their Capital and Current Accounts were as follows:

Capital Accounts (Rs.) Current Accounts (Rs.)

A 4,00,000 Cr. 20,000 Dr.

B 5,00,000 Cr. 10,000 Dr.

C 6,00,000 Cr. 15,000 Dr.

Their partnership deed provided for the following:

(i) Interest on Capital @ 9% p.a.

(ii) Salary to A @ Rs. 50,000 per quarter on 1.1.2016 C had given a loan of Rs. 2,00,000 to the firm at
6% per annum interest.

(iii) During the year their drawings were A Rs. 40,000, B Rs. 75,000 and C Rs. 55,000.

(iv) On 1.1.2018, A introduced further capital Rs. 2,00,000.

(v) The net profit of the firm before allowing interest on C’s loan was Rs. 4,00,000.

(vi) Prepare Profit and Loss Appropriation Account of the firm for the year ending 31.3.2018 and the
Current Accounts of the partners.

5. Pass necessary rectifying journal entries for the following omissions committed while preparing Profit and Loss
Appropriation Account. You are also required to show your workings clearly.

(i) A, B and C were partners sharing profits and losses equally. Their fixed capitals were A Rs. 4,00,000; B Rs.
5,00,000 and C Rs. 6,00,000. The partnership deed provided that interest on partners’ capital will be allowed
@ 10% per annum. The same was omitted.

(ii) P, Q and R were partners in a firm sharing profits and losses in the ratio of 2: 2: 1. Their
partnership deed provided that interest on partners’ drawings will be charged @ 18%
p.a. Interest on the partners’ drawings was Rs. 1,000, Rs. 500 and Rs. 2,000 respectively.
The same was omitted.