Past Adjustments in Partnership Accounts: Wrong Profit Sharing Ratio

Past adjustments in partnership accounts look confusing because they come after the accounts have already been closed.

At first, students wonder: if the final accounts are already prepared, why are we touching the partners’ accounts again?

The answer is simple. Sometimes profit was distributed wrongly. Maybe the old profit sharing ratio was used by mistake. Maybe interest on capital was missed. Maybe interest on drawings was not charged. Maybe a partner’s salary or commission was forgotten.

Past adjustment is the correction made later so that every partner finally gets the amount they should have received.

Once you understand this idea, the chapter becomes much easier. You stop memorising entries and start seeing the fairness behind them.

What Past Adjustment Means

Past adjustment means an adjustment made for an error or omission discovered after final accounts have been prepared and profit has already been distributed among partners.

In partnership accounts, profit is not always divided immediately in the profit sharing ratio. Before final distribution, the firm may need to allow or charge items such as:

Item	Effect
Interest on capital	Credited to partners, if allowed
Interest on drawings	Debited to partners, if charged
Partner salary	Credited to the concerned partner, if allowed
Partner commission	Credited to the concerned partner, if allowed
Partner’s loan interest	Usually treated separately as interest on loan
Correct profit sharing ratio	Used to divide the final distributable profit

If any of these items is missed or wrongly applied, the partners’ accounts will not show the correct position. Past adjustment fixes that position.

The firm usually does not disturb the old Profit and Loss Appropriation Account again. Instead, it passes an adjustment entry in the partners’ Capital Accounts or Current Accounts.

When the Old Profit Sharing Ratio Is Applied Wrongly

This is one of the most common past adjustment situations.

Suppose partners changed their profit sharing ratio from a certain date. But while preparing accounts, the accountant used the old ratio by mistake. The total profit may be correct, but the distribution among partners is wrong.

For example, if a profit of Rs. 90,000 was shared in the old ratio of 3:2:1, but it should have been shared in the new ratio of 2:2:1, one partner may have received too much and the others may have received too little.

The total remains Rs. 90,000. The mistake is only in the division.

The Core Rule

Use this rule in almost every past adjustment question:

Compare what was actually done with what should have been done.

Then apply this:

Situation	Treatment
Partner received excess credit	Debit that partner
Partner received short credit	Credit that partner
Partner was debited too much	Credit that partner
Partner was debited too little	Debit that partner

For profit distribution mistakes, the wording becomes even simpler:

Debit the partner who got extra profit.
Credit the partner who got less profit.

That is the heart of past adjustments.

Capital Account or Current Account?

Before writing the entry, check whether the question follows fixed capital or fluctuating capital method.

Method	Adjustment usually goes to
Fixed capital method	Partners’ Current Accounts
Fluctuating capital method	Partners’ Capital Accounts
No instruction given	Usually Partners’ Capital Accounts

Under fixed capital method, regular partner adjustments are recorded in Current Accounts because Capital Accounts normally remain fixed.

Under fluctuating capital method, these adjustments are recorded directly in Capital Accounts.

Direct Adjustment Method

The direct adjustment method is the neatest way to solve these questions. It avoids making many separate entries and focuses only on the final net correction required.

Use these steps:

1. Write the profit or item that was wrongly distributed.
2. Calculate the amount actually credited or debited to each partner.
3. Calculate the amount that should have been credited or debited to each partner.
4. Find the net effect for each partner.
5. Debit partners who received excess benefit.
6. Credit partners who received less benefit.
7. Pass one adjustment entry.

This method is popular because the total of all net effects will always cancel out. The total debit will equal the total credit.

Solved Example: Old Ratio Used Instead of New Ratio

Let us take a clean example.

A, B, and C are partners. They earlier shared profits in the ratio 3:2:1. From the beginning of the year, they agreed to share profits in the ratio 2:2:1.

At the end of the year, profit of Rs. 90,000 was mistakenly distributed in the old ratio of 3:2:1.

Pass the adjustment entry.

Step 1: Calculate What Was Actually Credited

The profit was wrongly shared in the old ratio 3:2:1.

Total parts:

3 + 2 + 1 = 6

So the actual credits were:

Partner	Actual share in old ratio 3:2:1
A	Rs. 45,000
B	Rs. 30,000
C	Rs. 15,000
Total	Rs. 90,000

Step 2: Calculate What Should Have Been Credited

The correct ratio was 2:2:1.

Total parts:

2 + 2 + 1 = 5

So the correct credits should have been:

Partner	Correct share in new ratio 2:2:1
A	Rs. 36,000
B	Rs. 36,000
C	Rs. 18,000
Total	Rs. 90,000

Step 3: Prepare the Net Effect Table

Now compare actual with correct.

Partner	Actual credit	Correct credit	Net effect
A	Rs. 45,000	Rs. 36,000	Received Rs. 9,000 extra
B	Rs. 30,000	Rs. 36,000	Received Rs. 6,000 less
C	Rs. 15,000	Rs. 18,000	Received Rs. 3,000 less

A received too much. So A must be debited.

B and C received less. So B and C must be credited.

Step 4: Pass the Adjustment Entry

If accounts are maintained under fluctuating capital method, the entry will be:

A's Capital A/c Dr.              9,000
    To B's Capital A/c                   6,000
    To C's Capital A/c                   3,000

Narration:

Being adjustment made for profit wrongly distributed in old ratio instead of new ratio.

If the question says fixed capitals, write Current Accounts instead:

A's Current A/c Dr.              9,000
    To B's Current A/c                   6,000
    To C's Current A/c                   3,000

That is the complete answer.

Why Only One Entry Is Passed

Students sometimes feel one entry is too small for such a large correction. But one entry is enough because the mistake is internal among partners.

The firm does not have to pay or receive anything from outside. Cash is not affected. Bank is not affected. Total profit is not affected.

Only the sharing among partners was wrong.

So one partner’s account is debited and another partner’s account is credited. The adjustment moves the amount from the partner who got excess benefit to the partner who got short benefit.

Think of it like this:

Total profit was correct.
Only the partners' shares were wrong.
So only partners' accounts need correction.

Another Example: Equal Sharing Done by Mistake

Here is a second example because many questions hide the wrong ratio in simple language.

P, Q, and R are partners sharing profits in the ratio 5:3:2. Profit of Rs. 1,00,000 was mistakenly shared equally.

Pass the adjustment entry.

Actual Distribution

The profit was shared equally.

Partner	Actual credit
P	Rs. 33,333
Q	Rs. 33,333
R	Rs. 33,334
Total	Rs. 1,00,000

To avoid unnecessary paise-level complications in school answers, the question may be framed with a profit amount that divides cleanly. Let us use Rs. 90,000 for the working:

Partner	Actual credit in equal ratio
P	Rs. 30,000
Q	Rs. 30,000
R	Rs. 30,000
Total	Rs. 90,000

Correct Distribution

Correct ratio is 5:3:2.

Partner	Correct credit
P	Rs. 45,000
Q	Rs. 27,000
R	Rs. 18,000
Total	Rs. 90,000

Net Effect

Partner	Actual credit	Correct credit	Net effect
P	Rs. 30,000	Rs. 45,000	Received Rs. 15,000 less
Q	Rs. 30,000	Rs. 27,000	Received Rs. 3,000 extra
R	Rs. 30,000	Rs. 18,000	Received Rs. 12,000 extra

P should be credited. Q and R should be debited.

The entry will be:

Q's Capital A/c Dr.              3,000
R's Capital A/c Dr.             12,000
    To P's Capital A/c                  15,000

Narration:

Being adjustment made for profit wrongly shared equally instead of in the agreed ratio.

How to Solve Mixed Past Adjustment Questions

Sometimes the question is not only about wrong profit sharing ratio. It may say:

• Interest on capital was omitted.
• Interest on drawings was not charged.
• Partner salary was forgotten.
• Commission was allowed wrongly.
• Profit was distributed in the wrong ratio.

Do not panic. The method remains the same.

Prepare a table with all items. Put every correct debit or credit against each partner, then compare with what was actually done.

For example:

Item	Debit or credit in partners’ accounts
Interest on capital omitted	Credit the partners who should have received it
Interest on drawings omitted	Debit the partners who should have been charged
Partner salary omitted	Credit the partner entitled to salary
Profit wrongly distributed	Reverse excess share and give short share

After writing all effects, total each partner’s column. Then pass one final adjustment entry for the net result.

Profit and Loss Adjustment Account Method

Some questions may ask for adjustment through Profit and Loss Adjustment Account.

In that method, the omitted or wrong items are first routed through a Profit and Loss Adjustment Account. Then the balance of that account is transferred to partners in the profit sharing ratio.

This method is useful when the question specifically asks for it. But if the question simply says “pass the necessary adjustment entry”, the direct adjustment method is usually faster.

Here is the difference:

Method	What you do
Direct adjustment method	Find net effect and pass one entry between partners
Profit and Loss Adjustment Account method	Record omitted items in a separate adjustment account, then transfer the balance

Both methods aim for the same final result: correct partner accounts.

Common Mistakes Students Make

The first mistake is using the correct ratio only and forgetting what was actually done. Past adjustment always needs both sides of comparison.

The second mistake is debiting the partner who received less. That is opposite of what should happen. A partner who received less must be credited because their account needs to increase.

The third mistake is involving Cash Account or Bank Account. In most past adjustment questions, no cash changes hands. The correction happens only through partners’ accounts.

The fourth mistake is using Capital Accounts when the question clearly says fixed capitals. In that case, use Current Accounts for the adjustment.

The fifth mistake is skipping the net effect table. Even if the final answer is short, the table proves your logic and reduces careless mistakes.

A Quick Test Before Writing the Final Entry

Before you write the final journal entry, ask yourself these questions:

1. What ratio was actually used?
2. What ratio should have been used?
3. Who got excess profit?
4. Who got less profit?
5. Are capitals fixed or fluctuating?
6. Does the total debit equal the total credit?

If all six answers are clear, the entry will almost write itself.

Frequently Asked Questions

What is past adjustment in partnership accounts?

Past adjustment is the correction made when an error or omission is found after final accounts have been prepared and profit has already been distributed among partners. It corrects the partners’ Capital Accounts or Current Accounts.

What is the easiest way to solve past adjustment questions?

The easiest way is to prepare a net effect table. Write what was actually credited or debited, write what should have been credited or debited, then find the difference for each partner.

Who is debited when profit is shared in the wrong ratio?

The partner who received excess profit is debited. This reduces their account to the correct amount.

Who is credited when profit is shared in the wrong ratio?

The partner who received less profit is credited. This increases their account to the correct amount.

Should we use Capital Account or Current Account for past adjustment?

Use Current Accounts if the question follows fixed capital method. Use Capital Accounts if the question follows fluctuating capital method or does not mention fixed capitals.

Is Cash Account used in past adjustment entries?

Usually, no. Past adjustment entries normally correct only the partners’ accounts. Cash or Bank Account is not affected unless the question gives a separate cash settlement.

What if more than one mistake is found?

Put all mistakes in one net effect table. Include omitted interest on capital, interest on drawings, partner salary, commission, and wrong profit distribution if they are given. Then pass one final adjustment entry for the net effect.

Why are old accounts not reopened?

Old accounts are usually already closed. Instead of rewriting them, the firm passes an adjustment entry in the current year to correct the extra or short amount in each partner’s account.