Past adjustments

The essentials

After final accounts are closed, the firm may discover that something was omitted or wrongly applied, such as interest on capital not allowed, interest on drawings not charged, a salary missed, or profits shared in the wrong ratio. Instead of reopening the old accounts, a single adjustment entry is passed through partners' capital (or current) accounts.

Key points

• Step 1: Find what each partner should have received (the omitted item).
• Step 2: Find how the same total would have reduced the profit shared, i.e. what each partner should have been debited in the profit-sharing ratio.
• Step 3: Net the two amounts for each partner; partners with a net gain are credited and those with a net loss are debited.
• The total of debits equals the total of credits, so the firm's total capital does not change.
• A table showing the effect for each partner (credit, debit, net) makes the working clear.

Exam tips

Many questions combine several errors (for example, interest on capital omitted and salary missed). Put all items in one table and pass one combined entry.

Common mistakes

• Passing the whole omitted amount as a credit without the matching debit in the profit ratio.
• Using the new ratio instead of the ratio in which profits were actually shared.