Admission of Partner - Adjustment of Reserve and Accumulated Profit and Loss

 Meaning of Adjustment of Reserves and Accumulated Profits on Admission of a New Partner

When a new partner is admitted into a firm, they are entitled only to the future profits of the business and not to the profits or reserves earned before their admission. Therefore, before admitting the new partner, the existing partners must adjust all accumulated profits, reserves, and losses among themselves in their old profit-sharing ratio.

If, at the time of admission, there are any balances in reserves, accumulated profits, or losses appearing in the Balance Sheet, these amounts are transferred to the old partners’ capital accounts in their old profit-sharing ratio.

Why Is Adjustment Needed?

Reserves and accumulated profits or losses belong solely to the existing partners, as these amounts were earned before the new partner’s admission. Therefore, they must be distributed or adjusted among the old partners before the new partner enters the firm.

These reserves and accumulated profits or losses relate to earlier accounting periods, i.e., periods prior to the new partner’s admission. Since the new partner did not contribute to earning these amounts, they have no right over them. Hence, the balances are distributed among the old partners in their old profit-sharing ratio.

Journal Entries for Adjusting Reserves and Accumulated Profits on Admission of a New Partner

When Reserves and Accumulated Profits Are Transferred to Old Partners (in Old Ratio)

Journal Entry:

Profit & Loss A/c (Cr. Balance) Dr.  

General Reserve A/c Dr.  

Workmen Compensation Reserve A/c Dr.  

Investment Fluctuation Reserve A/c Dr.  

      To Old Partners’ Capital A/c (in old ratio)

Effect: In the new Balance Sheet, the balances of General Reserve, Profit & Loss A/c (Credit), and other reserves will not appear, as they have been fully transferred to the old partners.

When Accumulated Losses Are Transferred to Old Partners (in Old Ratio)

Journal Entry:

Old Partners’ Capital A/c Dr.  

      To Profit & Loss A/c (Debit Balance)  

      To Deferred Revenue Expenditure A/c (e.g., Advertisement Expense)

Effect: These losses will also not appear in the new Balance Sheet, as they have been adjusted against the old partners’ capital accounts.

Illustration - (Distribution of General Reserve and Accumulated Losses)

A and B are partners in a firm sharing profits and losses in the ratio of 5: 3. C was admitted for 1/3rd share in the profits. On the date of C’s admission, the Balance Sheet of A and B showed:

1. General Reserve = ₹60,000
2. Profit & Loss A/c (Dr./Loss) = ₹20,000 on the assets side

Pass necessary journal entries on the treatment of these items on C’s admission.

Solution: Journal Entries

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	General Reserve A/c ……Dr.		60,000
	To A’s Capital A/c			37,500
	To B’s Capital A/c			22,500
	(Being the general reserve divided between the old partners in old ratio)
	A’s Capital A/c ……Dr.		12,500
	B’s Capital A/c ……Dr.		7,500
	To Profit and Loss A/c			20,000
	(Being the accumulated losses distributed between the old partners in old ratio)

Related Posts

Previous

Next