Year end adjustments in partnership

In addition to the usual year end adjustments (e.g. for accrued and prepaid expenses) made by traders to ensure correct measurement of year’s profits and a true reflection of their financial position in the balance sheet, the following adjustments are peculiar to partnership firms:

(a). If any expense has been paid by a partner on behalf of the firm out of his personal pocket and no entry has yet been made in the firm’ book to record this fact, at the end of the year:

  • The relevant expense account should be debited
  • The relevant partner’s current account should be credited with the amount of expense paid by the partner.

The effect of the above entry would be two-fold.

  • When preparing the Profit and Loss Account of the firm, the expense would be shown at a higher amount, i.e. the amount shown in Trial Balance plus the amount paid by the partner.
  • The current account of the relevant partner would show an increased credit balance, or a reduced debit balance.

(b). If any expense has been paid by the firm on behalf of a partner and such a payment has been debited to an expense account of the firm, at the end of the year:

  • The relevant partner’s current account should be debited
  • The relevant expense account should be credited with the amount of expense paid by the firm on behalf of the partner.

The effect of the above entry would be two-fold.

  • When preparing the Profit and Loss Account of the firm, the expense would be shown at a lesser amount, i.e. the amount shown in Trial Balance less the amount paid by the firm on behalf of a partner.
  • The current account of the relevant partner would show an increased debit balance or a reduced credit balance.

(c). If a partner is entitled to a salary and that salary has already been paid to him. there are two ways in which this could be handled. Ideally, such payments should be debited to a specially opened account, Partners’ Salary Account. At the end of a financial year, the debit balance on this account should be treated in the same manner as drawings and thus transferred to the debit of the relevant partner’s current account.

If, however, the salary payments made to a partner have been debited to the firm’s Salary Account along with the salaries paid to the firm’s employees, the following adjustment should be made at the end of the year:

  • When preparing the firm’s Profit and Loss Account, salaries expense should be at the amount shown in the Trial Balance less the amount paid to a partner or partners.
  • The relevant partner’s current account should be debited by the amount of salary already received by him.

It should be noted that the above entries are in addition to the entries that are made in the Profit and Loss Appropriation Account and partner’s current account to give the partner credit for his salary.

If a partner is entitled to a salary, such salary is credited to his current account and debited to Profit and Loss Appropriation Account. When such salary is actually paid to the partner, it is debited to his current account and credited to firm’s cash account. The above adjustment applies equally to other benefits allowable to partners. e.g. commissions, bonus, etc.

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