Question

How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?

Answer 1

When a new partner is admitted in a partnership firm, then all past accumulated profits or losses and reserves are distributed among all the old partners in their old profit sharing ratio. This is because these profits and losses are attributable to the hard work and labours of the old partners and consequently, the old partners are liable to bear past losses or profits, if any. The new partner is not entitled for a share in these profits as he/she did not contribute anything for the past performance of the business.

Accounting Treatment of Accumulated Profits and Losses
i) For distributing accumulated profits and reserves
Profit and Loss A/c                                                       Dr.
General Reserve A/c                                                     Dr.
Reserve Fund A/c                                                         Dr.
Workmen’s Compensation Fund A/c                           Dr.
Contingency Reserve A/c                                             Dr.
                To Old Partners’ Capital A/c
(Undistributed profits and reserves are distributed among old partners in their old profit sharing ratio)

ii) For distributing accumulated losses
Old Partners’ Capital A/c                                          Dr.
          To Profit and Loss (Debit balance) A/c
          To Deferred Advertisement Expenses A/c
          To Preliminary Expenses A/c
(Undistributed losses are distributed among old partners in their old profit sharing ratio)