Past Adjustments & Guarantee

  • After closing the accounts, sometimes it is discovered that there is omission of salary, distribution of profits in the wrong ratio, omission of interest on capital or drawings, etc. Old accounts cannot be altered, so an adjustment entry is passed.
  • For this, we will compute the amount already recorded and the amount that should have been recordedand finally compute difference between the two amounts.
  • Debit who received excess and credit who received short. Before closing partnership accounts, certain errors/ omissions are discovered, which are to be rectified before closing the accounts.
  • These errors are discovered after closing Profit & Loss account but before preparing Profit &Loss Appropriations account.
  • A partner or partners can enjoy the right to have minimum amount of profit in a year as per the terms of partnership agreement.
  • Guarantee may be provided in an existing profit sharing ratio or in some other agreed ratio. This guarantee may be provided by one partner or by all the partners.
  • For this we calculate the actual share of profits of all partners and record it in inner column of P & L Appropriation A/c, add the shortage amount (guaranteed amount – actual share of profit) to the guaranteed partner’s share. Finally we distribute the shortage among guaranteeing partners in their agreed ratio.

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  • Q1

    A and B are partners sharing profits equally, but wrongly they have divided the profits of ₹ 30,000 in the ratio 2:1. The adjusting entry will be

    Marks:1
    Answer:

    Dr A by 5,000 and Cr. B by 5,000

    Explanation:

    Right credit to A and B should be ₹ 15,000 each

    Wrong credit to A and B ₹ 20,000 and ₹ 10,000 respectively

    Dr A by ₹ 5,000 and Cr. B by ₹ 5,000

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  • Q2

    All the omission and commission under partnership accounts are adjusted by :

    Marks:1
    Answer:

    Rectifying Journal Entries.

    Explanation:

    All the omission and commission are adjusted by preparing statement showing past adjustments and than making journal entries for correction of their wrong impact.

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  • Q3

    A, B and C are partners in a firm sharing profits in the ratio of 3:2:1. But wrongly the profits of ₹ 18,000 were divided equally. Pass the necessary adjusting entry.

    Marks:1
    Answer:

    Debit C and Credit A by ₹ 3,000

    Explanation:

    Amount wrongly credited to them is ₹ 6,000 each

    Right credit that should be given to them = 9,000, 6,000 and 3,000 respectively

    So A will be credited by ₹ 3,000 and C will be debited by ₹ 3,000

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  • Q4

    A and B contribute ₹ 50,000 and ₹ 30,000 respectively as capital on which they agree to allow interest at 6% p.a. Their profit sharing ratio is 3:2 and the profit for the year is ₹ 4,000 before allowing interest on capitals. Interest on capital payable to each partner shall be

    Marks:1
    Answer:

    2,500 and 1,500 respectively.

    Explanation:

    The profits are inadequate to cover interest on capitals. Hence, the available profits are divided among partners in proportion to capitals.

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  • Q5

    Profits earned by a partnership firm for the year ended 31st March 2019 were distributed equally between the partners - A and B without allowing interest on capital (A ₹ 3,000 and B ₹ 1,000). Pass the necessary adjusting entry.

    Marks:1
    Answer:

    Debit B's Capital A/c and credit A's Capital A/c by 1,000

    Explanation:

    Amount should be credited to A and B =₹ 3,000 and ₹ 1,000 (= ₹ 4,000)

    Amount wrongly credited as profit is ₹ 2,000 each (4,000 divided equally)

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