Past Adjustment

In several cases, when the final accounts of any firm have already been closed, various matters might be added on a later date or accidentally get left out. Such an erroneous account history can lead to disarray in the firm. To tackle this situation, one of the most common solutions opted by accountants is passing a past adjustment entry.

What do you Mean by Past Adjustment in Partnership?

In Partnership Accounting, past adjustments are an essential entry in the Net Profit section under Profit and Loss Appropriation A/C of a firm. The Net Profit A/C of a firm denotes the overall profit distribution among all firm owners.

Distribution of profit usually takes place in the given ratio and other terms and conditions accepted among those in partnership.

For example, if at a certain period of a financial year, a situation arose for which the distribution of profit had to be changed for the remainder of the fiscal year. In such situations, the final account of the company is not altered, but an adjustment entry is passed at the end of the current fiscal, or at the beginning of the following one. 

Brush up your memory on profit sharing ratios and rectification of errors in profit and loss account with the following vital tips –

  • What is a New Profit-Sharing Ratio?

Ans. A new profit-sharing ratio can be defined as a proportion of profit distribution accepted by both old and new owners of a firm (who are in a partnership). Key features of the profit distribution strategy in such cases –

  1. New partners obtain their profit from the shares in profit from the old partners. In simple terms, former partners are required to forego a portion of their profit in kindness for the new partners. 

  2. If the terms and conditions mentioned during initiation of such a partnership do not state how new partners gain their shares in profit, then it is to be assumed that the profit-sharing ratio has the final say in the distribution of profit.

  3. Moreover, if the terms and conditions included a certain percentage of the share which would be granted to new partners, profit will be distributed accordingly. 

  4. The remaining profit will be shared among the old partners as per their proportions calculated from the new profit-sharing ratio.

These are the key points you need to refer to before solving the numerical questions on past adjustments in partnership accounts.

Q1. Arijit and Aritra own an agricultural shipping business. They share the profits of their company Go Green Ltd. at a ratio of 3:2. They took in partner Sujon during the middle of a fiscal year with a new partner who would receive 1/5th of the future profits. However, this important statement was ignored while distributing profits. What is the method for rectifying errors in profit and loss A/C of this firm?

Ans. So, as per this question, initially:

Arijit’s share of profit = 35 and Aritra’s share of profit = 25

Sujon will receive 15 of the overall profit, in that case remaining share = 1 -  15 = 45

So, Arijit’s share after Sujon came into partnership = 35 of 45= 1225

Similarly, Aritra’s share after Sujon came into partnership = 25 of 45= 825

Therefore, new profile sharing ratio = 1225 : 825 :15=12:8:5

Hence, profit generated by Go Green will be distributed among company partners Arijit, Aritra and Sujon in the ratio 12:8:5.

Different Types of Past Judgements in Partnership

There are various reasons behind companies and firms passing a past adjustment entry to resolve any discrepancies issued while distributing profits, forming the balance sheet, revising all journal entries etc. 

Among those issues, the most common errors leading to such disagreements can be classified as two types –

  • Single Error

In such cases, an adjustment table is constructed where the rectified amount is mentioned along with the journal entry passed to resolve the error. 

  • Multiple Errors

In such cases, a Profit and Loss Appropriate A/C is prepared, which falls under several components of the final account, where all the adjustments are noted along with working notes. A past adjustment entry is passed where the error is rectified.

This is done mainly to leave prior calculations and tabulations in the final account unaltered.

Consult this numerical which has been solved below to understand the fundamentals of making a past adjustment in accountancy.

Q2. Let us consider that Mainak and Arjun are partners in a business, sharing profits in 2:1 ratio, respectively. Few months into fiscal year 2019, they accept Riti as a partner with 25% share in profits with a guarantee that she will receive at least Rs. 60,000 as her share. Net profit for this business for the financial year of 2019 was Rs. 1,80,000. Prepare the past adjustment partnership account for this business.

Ans. As per the given information,

Riti’s share of profit = 25% = 14

Therefore, remaining share = 1 - 14=34

Arjun’s share of profit = 23 of 34 = 612

Similarly, Mainak’s share = 13 of 34 = 312 

New profit-sharing ratio = 14 : 612 : 312=1:2:1 for Riti, Arjun and Mainak respectively. 

Hence, profit distributed to Arjun = 24 of Rs. 1,80,000=Rs. 90,000

Similarly, profit distributed Mainak and Riti each = 14 of Rs. 1,80,000=Rs. 45,000

However, as per the terms, Riti should be receiving Rs. 60,000 as profits.

So, the remaining terms, i.e. Rs. (60,000 – 45,000) or a deficit of Rs. 15,000 will be borne by Arjun and Mainak as per the new profit ratio, which is 2:1.

Arjun’s net profit = Rs. 90,000 - (23 of Rs. 15,000) = Rs. 80,000

Mainak’s net profit = Rs. 45,000 - (13 of Rs. 15,000) = Rs. 40,000

The journal entry is given below –

Past Adjustment Entry

Profit and Loss Appropriation Account

Particulars

Amount (Rs.)

Particulars

Amount (Rs.)

To Profit Transferred to

 

    By Net Profit           

1,80,000

Arjun’s Capital A/c  90,000

 

 

 

Debit to Riti          10,000

    80,000  

 

 

Mainak’s Capital A/c   45,000

 

 

 

Debit to Riti          5,000

          40,000

 

 

Riti’s Capital A/c       45,000

 

 

 

  Credit from Arjun  10,000

 

 

 

Credit from Mainak 5,000

            60,000

 

 

 

1,80,000

 

1,80,000


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FAQ (Frequently Asked Questions)

1. What do you Mean by Past Adjustment?

Ans. In case there are any errors or changes in the profit distribution or other entries in the profit and loss A/C of a firm, an entry termed as the past adjustment is passed to rectify all the errors.

2. What are Different Types of Errors for which Past Adjustment Entries are Passed?

Ans. Types of errors for which most past adjustment entries are passed are single errors and multiple errors.

3. What do you Mean by a Guarantee?

Ans. A guarantee is nothing but an assurance given to any partner in a firm where he or she receives a particular amount irrespective of his or her actual share divisions in business profits.