Adjustments in accounting for partnership firms may be needed whenever something relating to the past period has to be corrected or adjusted. For the purpose of their treatment in accounting, these past period corrections can be classified into two

1. Re-appropriations

   Corrections pertaining to the past periods which involve appropriations only.

   These corrections would only influence the Nominal a/c's and/or Partners Capital/Current a/c's.

2. Adjustments

   Corrections pertaining to the past periods which involve adjustments.

   These corrections may influence all types of accounts Real, Personal and Nominal including Partners Capital a/c's.

The need for re-appropriation arises primarily on account of two reasons.

1. error rectification

   Interest on Capital, Salary to Partners, Commission to Partners, etc., are all appropriations of profits.

   Erroneous appropriations may be on account of

   • errors in calculating the appropriable amounts or/and
   • errors in recording or posting (Accounting errors) the transactions relating to appropriations.

   These would result in erroneous balances in Partners Capital a/c's.

   Where such errors are subsequently identified they need to be corrected by re-appropriation of profits already appropriated. Such re-appropriations would influence only the Partners Capital a/c's.

   Re-appropriation can be visualised as taking back the amount that has been erroneously distributed and distributing the correct amounts again.

2. Change in relation between partners with retrospective effect

   Partners may decide to change the inter relationship between themselves with retrospective effect

   retrospective

   • Concerned with or related to the past

   Such a change to be incorporated into the books of accounts can be called re appropriation if the change would affect only Nominal a/c's and/or Partners Capital/Current a/c's only. The net effect of the nominal account balances is the net profit which ultimately finds its way into capital.

   Change need not be only in the profit sharing ratio

   Change in the relation between partners need not necessarily mean a change in the profit sharing ratio between the partners. It may be a change regarding the other appropriations like interest on capital, interest on drawings, salaries to partners etc., incorporating which would be similar to correcting past appropriations.

The re-appropriations to be made may pertain to profits relating to a single accounting period or two or more accounting periods.

Old and New profit sharing ratios

Since there are two or more periods involved, one the current period and the others relating to the past period, there is a possibility that there is a difference in the profit sharing ratio between partners in the periods involved. This should be taken note of and the relevant proportions should be used.

To give a clear understanding as to the reason for which the recordings are being done, we use a ledger account by name "Profit and Loss Re-Appropriation a/c". This account is affected by transactions relating to re appropriations. It provides the information relating to the net gain or loss on account of re-appropriation transactions.

balance

The net balance in the Profit and Loss Re-Appropriation a/c indicates the net effect of all such re apprporation transactions. This account is closed by appropriating the balance between the partners and transferring them to their capital/current accounts.

This account is sometimes named "Profit and Loss Adjustment a/c" or "Profit and Loss Re-Adjustment a/c".

Prepare a working notes as below

Calculations for Re appropriations

Particulars	Firm	A	B	C
Past appropriations withdrawn a) Interest on Capital b) Interest on Drawings c) Distributed Profits	+ 25 − 9 + 18	− 10 + 4 − 6	− 8 + 2 − 9	− 7 + 3 − 3
1) Net appropriation withdrawn	+ 34	− 12	− 15	− 7
Re appropriations A) Interest on Capital B) Salary to Partners C) Commission to Partners	− 16 − 24 − 12	+ 5 + 8 + 8	+ 8 + 8 –	+ 3 + 8 + 4
2) re appropriations (in all)	− 52	+ 21	+ 16	+ 15
3) Re appropriation profit/loss	+ 18	− 6	− 9	− 3
4) Total re appropriation (2) + (3)	− 34	+ 15	+ 7	+ 12
5) single entry adjustment (1) + (4)	0	+ 3	− 8	+ 5

Firm's re appropriation profit or loss = - [(1) + (2)];

This is to be distributed among partners in their past profit sharing ratio.

For partners

• Negative (−) value indicates an amount withdrawn or taken from them (debit to their account).
• Positive (+) value indicates an amount given to them (credit to their account).

Withdrawals

Only those appropriations which are erroneous are withdrawn.

Distributed profits may have to be withdrawn if there is a difference with respect to appropriating past distributable profits. This may be on account of an error or on account of a change in the profit sharing ratios with retrospective effect.

Re appropriations

How re appropriation is done is dependent on the facts of the case. It is not a requirement that all types of withdrawals are re appropriated. There may be some appropriations done in the past that would not be considered while re appropriating and at the same time there might be some others which find a place only at the time of re appropriation.

Say the partners might agree that there would be no interest on drawings charged with retrospective effect, in which case the interest on drawings charged in the past is withdrawn and is not taken into consideration while re appropriating. Salary to partners not provided earlier might be taken into consideration at the time of re appropriation.

There are two ways the correction (re-appropriations) can be done.

1. Recover and Re appropriate

   1. Recover the total amount appropriated in the past from the partner's capital accounts.

      Journal

      Particulars		Amount (Dr)	Credit (Cr)
      A's Capital a/c B's Capital a/c C's Capital a/c To Profit and Loss Re-Appropriation a/c	Dr	12 15 7	34

      Separate entries for withdrawing each past appropriation can be recorded. It would provide the information relating to how much amount is being withdrawn from each partner in relation to each past appropriation.

      However it would not be of much use as the individual figures for the appropriations being withdrawn are available in the form of postings relating to appropriations done in the past.

      In most cases, the objective would be to rectify the position and not provide the utmost detail relating to each and every transaction involved in the process of re appropriation.

   2. Re-appropriate in the correct manner from the 'Profit and Loss Re-appropriation a/c'.

      with complete details of re appropriation

      The re appropriation may be made giving complete details of the re appropriation by recording all the re appropriations separately for each kind of re appropriation. There would be as many transactions as there are re appropriations.

      only the total amount re appropriated

      If the detailed information regarding the various items of re-appropriation is not required and only the effect of the rectification is required to be brought into the books, then only the entry for distributing the total amount of re-appropriation from the 'Profit and Loss Re-appropriation a/c' is recorded.

      Under this method, whatever may be the number of types of re appropriations, there will be only two entries. One for withdrawing the past appropriations and the other for re-appropriating.

      Journal

      Particulars		Amount (Dr)	Credit (Cr)
      A's Capital a/c B's Capital a/c C's Capital a/c To Profit and Loss Re-Appropriation a/c	Dr	12 15 7	34
      Profit and Loss Re-Appropriation a/c To A's Capital a/c B's Capital a/c C's Capital a/c	Dr	34	15 7 12

      (1) and (4) in the above working note would provide the required data

2. Adjust Partners Capital Accounts (using a single journal entry)

   If the organisation intends to rectify the errors and does not require any information relating to the past appropriations withdrawn and re appropriations, then only a single journal entry between the partners capital/current accounts is recorded to incorporate the rectification.

   The adjustment to be made can be obtained from the working table itself. If adjustment (= rectified appropriation − past appropriation), negative value for adjustment indicates the partner has to give (debit his account) and a positive value indicates that the partner has to be given (credit his account).

   Journal

   Particulars		Amount (Dr)	Credit (Cr)
   A's Capital a/c C's Capital a/c To B's Capital a/c	Dr Dr	3 5	8

Radha, Nimmi and Bindu are partners in a firm sharing profits and losses in the ratio 1 : 3 : 2. They had made a profit of 2,40,000 during the last accounting period. They were entitled to a salaries of 8,000, 10,000 and 12,000 respectively. The profits after charging their salaries was distributed among the partners in their profit sharing ratio.

It was later discovered that the following appropriations have not been taken into consideration while distributing the profits.

• Salaries have been wrongly credited at 5,000 for all the partners.
• Commission of 8,000 payable to Bindu
• Interest on Fixed Capitals payable to Radha, Nimmi and Bindu as 5,000, 6,000 and 5,000 respectively.
• Interest on Drawings chargeable to Radha, Nimmi and Bindu as 1,000, 1,500 and 500 respectively.

You are required to make adjustments for the above and set right the accounts.

Partners profit sharing proportions

Radha : Nimmi : Bindu	=	1 : 3 : 2
	=	$\frac{1}{6}:\frac{3}{6}:\frac{2}{6}$

Calculations for Re appropriations

Particulars	Firm	Radha	Nimmi	Bindu
Past appropriations withdrawn a) Salary to Partners	+ 15,000	− 5,000	− 5,000	− 5,000
1) Net appropriation withdrawn	+ 15,000	− 5,000	− 5,000	− 5,000
Re appropriations A) Salary to Partners B) Commission to Partners C) Interest on Capital D) Interest on Drawings	− 30,000 − 8,000 − 16,000 + 3,000	+ 8,000 + 5,000 − 1,000	+ 10,000 + 6,000 − 1,500	+ 12,000 + 8,000 + 5,000 − 500
2) re appropriations (in all)	− 51,000	+ 12,000	+ 14,500	+ 24,500
3) Re appropriation profit/loss	+ 36,000	− 6,000	− 18,000	− 12,000
4) Total re appropriation (2) + (3)	− 15,000	+ 6,000	− 3,500	+ 12,500
5) single entry adjustment (1) + (4)	0	+ 1,000	− 8,500	+ 7,500

Firm's re appropriation profit or loss = - [(1) + (2)];

Share of Re appropriation profits

Partners Share of Profits = re-appropriation Profit × Profit Sharing Proportion

Radha's Share	:	$36,000\times \frac{1}{6}$	=	6,000
Nimmi's Share	:	$36,000\times \frac{3}{6}$	=	18,000
Bindu's Share	:	$36,000\times \frac{2}{6}$	=	12,000
				36,000

The following transactions are to be recorded to give complete information

1. recover the total past appropriation

   Journal

   Particulars		Amount (Dr)	Credit (Cr)
   Radha's Capital a/c Nimmi's Capital a/c Bindu's Capital a/c To Profit and Loss Re-Appropriation a/c	Dr	5,000 5,000 5,000	15,000

2. re appropriate

   Journal

   Particulars		Amount (Dr)	Credit (Cr)
   Profit/Loss Re-appropriation a/c To Salary to Partners a/c To Commission to Partners a/c To Interest on Capital a/c	Dr	54,000	30,000 8,000 16,000
   Interest on Drawings a/c To Profit/Loss Re-appropriation a/c	Dr	3,000	3,000
   Interest on Capital a/c To Radha Capital a/c To Nimmi Capital a/c To Bindu Capital a/c	Dr	16,000	5,000 6,000 5,000
   Salary to Partners a/c To Radha Capital a/c To Nimmi Capital a/c To Bindu Capital a/c	Dr	30,000	8,000 10,000 12,000
   Commission to Partners a/c To Bindu Capital a/c	Dr	8,000	8,000
   Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c To Interest on Drawings a/c	Dr Dr Dr	1,000 1,500 500	3,000
   Radha Capital a/c Nimmi Capital a/c Bindu Capital a/c To Profit/Loss Re-appropriation a/c	Dr Dr Dr	6,000 18,000 12,000	36,000

Profit and Loss Re Appropriation a/c

DrCr
Particulars	Amount (in Rs)	Particulars	Amount (in Rs)
To Salary To Partners To Commission to Partners To Interest on Capital	30,000 8,000 16,000	By Radha's Captial a/c By Nimmi's Captial a/c By Bindu's Captial a/c By Interest on Drawings a/c By Radha's Captial a/c By Nimmi's Captial a/c By Bindu's Captial a/c	5,000 5,000 5,000 3,000 6,000 18,000 12,000
	54,000		54,000

Partners Capital a/c's

DrCr
Particulars	Radha	Nimmi	Bindu	Particulars	Radha	Nimmi	Bindu
To P/L re appropriation To Interest on Drawings To P/L re appropriation To Balance c/d	1,000 – 1,000 –	1,500 – 1,500 –	500 – 500 –	By Balance b/d By Salary to Partners By Commission to Partners By Interest on Capital	– 8,000 – 5,000 35,000	– 10,000 – 6,000 1,05,000	– 12,000 8,000 5,000 70,000
	–	–	–		–	–	–
				By Balance b/d	–	–	–

Preparing Intermediary accounts like Salary to Partners a/c, Interest on Capital a/c etc can be ignored.

The total past appropriation is recovered to the profit and loss re appropriation a/c and the total rectified appropriation is distributed from it.

1. withdraw past erroneous appropriation in total

   Journal

   Particulars		Amount (Dr)	Credit (Cr)
   Radha's Capital a/c Nimmi's Capital a/c Bindu's Capital a/c To Profit and Loss Re-Appropriation a/c	Dr	5,000 5,000 5,000	15,000

2. re appropriate the new or rectified appropriation in total

   Journal

   Particulars		Amount (Dr)	Credit (Cr)
   Profit/Loss Re-appropriation a/c To Radha's Capital a/c To Bindu's Capital a/c	Dr	18,500	6,000 12,500
   Nimmi's Capital a/c a/c To Profit/Loss Re-appropriation	Dr	3,500	3,500

Profit and Loss Re Appropriation a/c

DrCr
Particulars	Amount (in Rs)	Particulars	Amount (in Rs)
To Radha's Captial a/c To Bindu's Captial a/c	6,000 12,500	By Radha's Captial a/c By Nimmi's Captial a/c By Bindu's Captial a/c By Nimmi's Captial a/c	5,000 5,000 5,000 3,500
	18,500		18,500

Partners Capital a/c's

DrCr
Particulars	Radha	Nimmi	Bindu	Particulars	Radha	Nimmi	Bindu
To P/L Re appropriation To P/L Re appropriation To Balance c/d	5,000 – –	5,000 3,500 –	5,000 – –	By Balance b/d By P/L Re appropriation	– 6,000	– –	– 12,500
	–	–	–		–	–	–
				By Balance b/d	–	–	–