ADJUSTMENTS OF PAST ERRORS IN PARTNERSHIP ACCOUNTS

ACCOUNTING FOR PARTNERSHIP FIRMS

LESSON - 6

ADJUSTMENTS OF PAST ERRORS

            After the firm prepares their financial statements of the accounting year sometimes there are chances of errors, omissions etc in the accounts prepared. These errors would have affected the capital accounts of the partners but spotted late. These errors committed should be rectified when it is spotted, but the errors are of historical in nature so we need to pass its rectifying entries to correct it. In partnership accounting these errors are rectified mostly through adjustment of partner's capital accounts. Rectification of these errors would either increase or decrease the capital accounts of the partners, that it may provide the partners with a profit or a loss.

TWO METHODS ARE FOLLOWED TO RECTIFY THE ERRORS:

            1) By passing a single adjustment entry to rectify all the errors (analytical table is prepared) or

            2) By passing adjustment entries for each error individually.

1) PREPARATION OF ANALYTICAL TABLE - single adjustment entry method

    

            All the errors committed in the previous years are taken in total, the errors may be of two possibilities in nature. The errors which increased (credited) the capital account and the errors which decreased (debit) the capital accounts of the partners. These errors will be reversed to rectify them. Out of the total error the net amount of all the errors is determined and a single rectifying journal entry is passed to correct the error committed.

            This procedure can be easily done with the help of preparing an table. This table is called analytical table. This table shows the net effect of all the errors and its effect on partners capital accounts.

FORMAT SAMPLE OF AN ANALYTICAL TABLE

ADJUSTMENT TABLE OR ANALYTICAL TABLE

Particulars	A Partners   Dr.                Cr.		B Partner   Dr.                 Cr.		C Partner   Dr.                 Cr.		Firm’s account   Dr.                 Cr.
Interest on capital .. given more .. given less   Interest on drawings .. taken more .. taken less   Salary/commission etc .. given more .. given less   Net profit or Net loss	XXX         XXX     XXX       XXX   Total	XXX     XXX         XXX   XXX     Total	XXX         XXX     XXX       XXX   Total	XXX     XXX         XXX   XXX     Total	XXX         XXX     XXX       XXX   Total	XXX     XXX         XXX   XXX     Total	XXX     XXX         XXX   XXX     Total	XXX         XXX     XXX       XXX   Total

            

             The result after balancing the table will show a difference in the Credit and Debit columns, this will be used to pass the rectifying entry by providing the information on whose capital account is to be debited and whose capital account is to be credited.

PROCEDURE TO FIND THE NET EFFECT

            Step 1 : An analytical table is a simple version of capital accounts of the partners, so according to the partners in the question columns should be prepared in the table.

            Step 2 : At the end after the partners capital accounts one column should be prepared for the firm, as the rectified changes that affect the partner's capital accounts will also be rectified in the firm's account.

            Step 3 : Now rectify the errors, any increase in amount should be credited and any decrease in the amount should be debited. The errors transactions which had wrongly increased or decreased the capital accounts of the partners should be treated in the opposite way to reverse the entries and rectify.

            Example : If any partner was given more amount (that is more amount was credited to him) so in order to rectify it we should decrease the amount given more than actual (it has to be debited) and same the opposite if a partner was given less amount (credited less) so now we have to give him his remaining amount (the balance amount credit to him again).

            Step 4 : After rectifying the errors any net profit or loss left will also be distributed among the partners.

            Step 5 : Finally balance the amount of each partner individually, this will show you which partner is to be debited and which partner is to be credited.

            Step 6 : Pass the single adjustment entry according to the Dr. and Cr. of the partners.

2) BY PASSING INDIVIDUAL JOURNAL ENTRIES TO RECTIFY:

            Each error committed will be rectified individually by passing journal entries for it under this method. In this method analytical table is not prepared instead journal entries are passed. The errors are rectified by opening profit and loss adjustment account. The errors are adjusted (debited or credited) through profit and loss adjustment account and finally profit and loss adjustment account is adjusted (debited or credited) to partners capital/current accounts respectively.

JOURNAL ENTRIES FOR RECTIFICATION OF ERRORS

1) Adjustment entries for the items which are to be CREDITED to the partner's capital account

            Profit and loss adjustment a/c                 Dr.                     XXX

                To partners capital/current a/c                                                                XXX

            (being previously omitted errors now rectified)

Example : 

            - Interest on capital was given less

            - Salary/interest on capital/commission etc omitted etc.

2) Adjustment entries for the items which are to be DEBITED to partners capital accounts

            Partners capital/current a/c                 Dr.                        XXX

               To profit and loss adjustment a/c                                                            XXX

            (being previously omitted errors now rectified)

Example : 

            - Interest on drawings omitted 

            - Salary/interest on capital etc was given more etc.

3) If net PROFIT out of the rectifications made

          

          Profit and loss adjustment a/c             Dr.                           XXX

                  To partners capital/current a/c                                                              XXX

          (Being profit on rectification credited to partners capital accounts)

4) If net LOSS out of the rectifications made

            Partners capital/current a/c                 Dr.                         XXX

                To profit and loss adjustment a/c                                                             XXX

            (Being loss on rectification debited to partners capital accounts)