Adjustment Entry for Machinery and Unpaid Liability in Partnership Firm

Introduction:
When a partnership firm purchases machinery under the hire purchase system, it means that the firm acquires the machinery with an initial down payment and agrees to pay the remaining amount in installments over a specific period of time. In this scenario, Raja and Rama have purchased machinery on hire purchase for 75,000, out of which only 7,500 has been paid. However, neither the machinery nor the unpaid liability appears in the statement of financial position of the partnership firm.

Importance of Including Machinery and Unpaid Liability:
Including machinery and unpaid liability in the balance sheet is essential for providing a true and fair view of the financial position of the partnership firm. It helps in accurately representing the assets and liabilities of the firm, ensuring transparency and completeness of the financial statements.

Adjustment Entry:
To rectify the omission of machinery and unpaid liability from the balance sheet, the following adjustment entry needs to be made:

1. Machinery Account:
Machinery Account is a nominal account that represents the value of machinery owned by the partnership firm. Since the machinery has been acquired on hire purchase, the total value of machinery needs to be recorded in the balance sheet. The adjustment entry for the machinery account would be as follows:

Machinery A/C Dr. 75,000
To Hire Purchase Creditor A/C 75,000

2. Hire Purchase Creditor Account:
Hire Purchase Creditor Account is a personal account that represents the unpaid liability towards the hire purchase company. As only 7,500 has been paid, the remaining unpaid liability of 67,500 needs to be included in the balance sheet. The adjustment entry for the hire purchase creditor account would be as follows:

Hire Purchase Creditor A/C Dr. 67,500
To Machinery Account 67,500

Impact on Balance Sheet:
After making the adjustment entry, the balance sheet of the partnership firm would reflect the correct position by including the machinery and unpaid liability:

Liabilities:
- Capital Accounts
- Current Liabilities (including unpaid liability towards hire purchase creditor)

Assets:
- Fixed Assets (including machinery)

Conclusion:
Including machinery and unpaid liability in the balance sheet is crucial for presenting a complete and accurate financial position of the partnership firm. By making the adjustment entry for machinery and unpaid liability, the balance sheet can be rectified to reflect the true state of affairs. This ensures transparency, enables proper evaluation of the firm's financial position, and helps stakeholders make informed decisions.