Fundamentals of Partnership-Level 1
About Lesson

Once the books for the partnership firm are closed, it is discovered that the firm, while closing the books, have forgotten to consider some expenses or have taken excess than required.

Examples –

  • Forgot to provide interest on capitals of partners
  • Forgot to charge interest on drawings of partners.
  • Incorrect distribution of profit and loss between partners.
  • Incorrect rate of interest charged on the loan.

How to solve this: –

  • Step 1 (Impact on P&L A/C) – Understand if the error or omission impact is on P&L Appropriation account or Profit and Loss account? There is a difference between these two. If the impact is on P&L account, correct the error and arrive at correct profit and do the P&L appropriation account entries in a usual manner.
  • Step 2 (Impact on P&L Appro. A/C) – Understand the impact of these errors or omissions on the balance of profit and loss appropriation account. Then compute the effect as if the error has been corrected and allocate the impact amongst partners as per their ratio. Reason – Since the P&L balance is allocated amongst partners in their ratio, the total impact should be allocated too amongst partners in ratio. Make sure you compute all transaction and arrive at the net balance of this before doing Journal entry.

Approach in Question-

There are two ways of doing it: –

  • Tabular method – Do all adjustments in Table and post one Journal entry to give effect to all errors and omissions adjustments. (useful when simple question not requiring full set of accounts)
  • Set of accounts method – Prepare the full set of accounts like Cap, Current, P&L Appropriation. Account and post reversals of incorrect amount and put correct amounts in P&L Appr. Accounts.

 (Galat entry wapas ley lo – Correct Entry ka paisa de do)

Example-

Partnership Firm – 123 Ltd

Partners – C:D: E

Ratio – 1:2:3

Capital- 25000/35000/45000 respectively

Profit – 8000

 

Case 1.- Forgot to provide interest on Capital as per deed?

Case 2.- Forgot to book salary of 2000 to B

Case 3 – Forgot to charge interest on loan of Rs. 1500 from C

Case 4- Profit incorrectly distributed. Profit distribution as per deed is in capital ratio.

 

Understand the logic and see how to attempt such questions.

Exercise Files
12. Past Adjustments.pdf
Size: 171.00 KB
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