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.

Nominal accounts

Thus, at the end of the accounting period, after having closed the profit and loss account, there would not be any nominal accounts in the books of accounts. This implies that the nominal accounts that we use are the ones that relate to the current accounting period, since the ones relating to the earlier accounting periods would have been closed.

Real and Personal accounts

Need

Methodology

Current Period

Past Periods

To ensure that past period error rectification does not affect the current period nominal accounts, we replace nominal accounts with Profit and Loss adjustment a/c in the rectification entries, whenever the rectification pertains to past periods.

We show the actual account in brackets instead of striking it off.

balance

This account in general is used whenever there are adjustments to be made of unconventional nature.

In such cases, we use profit and loss a/c in place of nominal accounts in the rectification entries. This would affect the current period profit which is acceptable since the error relates to the current period.

If the profit and loss account balance i.e. the net profit or loss is not available, we assume that the profit and loss account has also been closed by transfer to the profit and loss appropriation a/c or the capital accounts. In the absence of the information relating to the current period profit, we rectify the current period error as if it is a past period error i.e. by using profit and loss adjustment a/c in place of nominal account.

Prepare a working note in the below format wherever possible. In addition to the particulars column, provide a column for each ledger account affected.

+ indicates Debit and − indicates Credit

Using the format used in mechanised (computerised) accounting for journal entries may be convenient here.

Complete information

Minimal information (single journal entry)

Direct Ledger Accounts - Caution

If we are preparing the ledger accounts directly, we should be careful enough to ensure that the effect of all the adjustments required to be made is posted to the relevant accounts.

Preparation of the statements as above would always be helpful. If we are writing the journal entries it works as a working note. If we are preparing the ledgers directly, we can ensure that all transactions are taken into consideration.

There is no one method suits all. As you get the idea behind the working notes, you can always make modifications to suit your need, minimise working etc.

While checking the records they have noticed the following:

1. A machinery costing 50,000 purchased during 20_3 was debited to Repairs Account. 10% depreciation on reducing balance (on the last day of the accounting period) method is provided on plant and machinery.
2. It is decided that the method of recording Special Fee in the books was to be changed from "Cash Basis" to "Accrual Basis". The fees still receivable stood at 18,000.
3. The interest on fixed deposit due to the firm 4,000 was used by "They" for his personal expenses.

Make necessary adjustments to incorporate the above aspects and Appropriate the profits of the firm.

Partners Profit Sharing Proportions

• Machinery

  On account of rectification,

  for 2003

  Increase in Capital value	=	50,000
  depreciation chargeable	=	Increased closing balance × Rate of depreciation
  	=	50,000 × 10%
  	=	5,000

  for 2004

  Increase in Capital value	=	Increase in closing balance for 2003
  	=	Increased closing balance − depreciation thereon
  	=	50,000 − 5,000
  	=	45,000
  depreciation chargeable	=	Increased closing balance × Rate of depreciation
  	=	45,000 × 10%
  	=	4,500

• Profit and Loss Adjustment a/c balance

  Since − indicates a credit, the balance in this account indicates a credit balance which means a profit.

  Partners share = adjustment profit × profit sharing proportion

  You's Share	:	$45,000\times \frac{5}{10}$	=	22,500
  Me's Share	:	$45,000\times \frac{3}{10}$	=	13,500
  They's Share	:	$45,000\times \frac{2}{10}$	=	9,000
  				45,000

• Working notes (adjustment) table gives a net adjustment of − 17,500 to P/L a/c which indicates a credit in that account. This represents an increase of 17,500 in net profits.
• Interest on capital is assumed to be calculated on the opening balances.

  Interest on Capital = Opening balance of capital × 10%

  You	:	1,00,000 × 10%	=	10,000
  Me	:	1,50,000 × 10%	=	15,000
  They	:	1,00,000 × 10%	=	20,000
  				45,000

• Partners share of distributable profits = distributable profits × profit sharing proportion

  You's Share	:	$3,79,500\times \frac{5}{10}$	=	1,89,750
  Me's Share	:	$3,79,500\times \frac{3}{10}$	=	1,13,850
  They's Share	:	$3,79,500\times \frac{2}{10}$	=	97,900
  				3,79,500

Ledger Accounts
[Books of You, Me, They]

Ledger Accounts
[Books of You, Me, They]