Year End Adjustments in Partnership

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on November 16, 2021

To ensure the correct measurement of the year’s profits and to ensure that a true reflection of the company’s financial position is shown in the balance sheet, traders often make year-end adjustments.

In addition to the usual year-end adjustments, including those made for accrued and prepaid expenses, the following adjustments are specific to partnership firms:

1. If any expense has been paid by a partner on behalf of the firm out of their personal pocket and no entry has yet been made in the firm’s books to record the fact, the following should happen 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 the expense

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

  • When preparing the firm’s Profit and Loss Account, the expense would be shown at a higher amount (i.e., the amount shown in the 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

2. If any expense has been paid by the firm on behalf of a partner and such payment has been debited to an expense account of the firm, the following should happen 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 the expense paid by the firm on behalf of the partner

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

  • When preparing the firm’s Profit and Loss Account, the expense would be shown at a lesser amount (i.e., the amount shown in the 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

3. If a partner is entitled to a salary and that salary has already been paid, there are two ways to handle the situation.

Ideally, such payments should be debited to a specially opened account: namely, the Partners’ Salary Account.

At the end of a financial year, the debit balance on this account should be treated in the same way as drawings (i.e., 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 salary amount they have already received

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

If a partner is entitled to a salary, this salary is credited to their current account and debited to the Profit and Loss Appropriation Account.

When the salary is actually paid to the partner, it is debited to their current account and credited to the company’s cash account. This adjustment applies equally well to other benefits allowable to partners, including commissions and bonuses.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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