Past adjustments

Sometimes, after profits have been distributed and the accounts closed, an omission is found: interest on capital was forgotten, a salary was missed, or the profit sharing ratio changed. Instead of reopening and redrawing the old accounts, the error is corrected with one adjustment entry: a past adjustment.

It can be made through a Profit and Loss Adjustment Account, or directly in the partners' capital accounts.

Find each partner's net effect: what the partner should have received (or paid), minus the profit taken back from them in their ratio to pay for it. Make a table:

• what each partner should have been credited (or debited);
• the same total, recovered from them in the profit sharing ratio;
• the difference for each partner.

Then make one entry: debit the partners who gained (got more than they should), and credit the partners who lost. The debits and credits are equal: the total of the net effects is zero.

Example: interest on drawings of 2,000, 1,500 and 1,000 (4,500 in all) was omitted, with the ratio 5:3:2. The partners should have been debited those amounts, but the extra 4,500 of profit would have been shared 2,250, 1,350 and 900. Net: the first partner is credited 250; the second is debited 150; the third is debited 100.