Past Adjustments in Partnership
At the time of preparing the book of accounts in a partnership firm, a lot of attention is paid to the fact that there should be no errors in accounts so that the financial information is accurately represented.
The correctness of the accounts helps the business maintain a true and fair view of the business that is essential for the decision making in future.
Even after all this, there is a chance that some errors will be recorded which leads to incorrect representation of the transaction in the accounts.
Such errors can be easily rectified if it is noticed before final account preparation. These rectifications can be done using past adjustments.
These adjustments can be done in respect of interest on capital, remuneration of partners and interest on drawings etc.
Sometimes the errors or omissions get detected after the preparation of financial statements and the distribution of profit among the partners as per the profit sharing ratio decided in the business. In such cases, the existing entries are not altered instead a new adjustment entry is passed for rectifying the errors or omissions.
The new entry is linked with either the Profit and Loss Adjustment Account or directly in the capital account of the partners involved in the business.
The errors can occur due to changes in the partnership deed or any retrospective effect in the accounting policies.
This concludes the article on the topic of Past Adjustment in Partnership, which is an important topic of Commerce for Class 12 students. For more such interesting articles, stay tuned to CoolGyan’S.