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Question

Why is Profit and Loss Adjustment Account prepared? Explain.


Solution

Profit and loss adjustment account is prepared to record those transaction or omissions and errors which were left while preparing the final accounts and they are found after the final accounts have been prepared and the profits distributed among the partners. The omission may be in respect of interest on capital, interest on drawings, interest on partners' loan, partner's salary, partner's commission or outstanding expenses.

There may also be some changes in the provisions of partnership deed or system of accountings having impact with retrospective effect. All these acts of omission and commission need adjustments for correction of their impact. These omission errors and corrections can be recorded in partners' capital account directly but still it seems convenient to prepare the profit and loss adjustment account.

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