Accounting Treatment of Accumulated Profits and Reserves in case of Admission of a Partner

When a new partner is admitted in a partnership firm, all the accumulated profit, reserves, and losses are transferred to Partner’s Capital Accounts (if capital is fluctuating) or Current Accounts (if capital is fixed) in their old profit-sharing ratio. This is done because the reserves or accumulated profits/losses belong to the partners before the admission of a new partner to the firm. Accumulated profit/losses, and reserves are distributed among the old partners in the old profit-sharing ratio.

Accounting Treatment of Accumulated Profits and Reserves (Journal Entries):

Case 1: When Reserves and Accumulated Profit Accounts are closed:

A. For Transfer of Reserves, Accumulated Profits etc.:

B. For Transfer of Accumulated Losses:

Illustration 1:

Consider Mohan and Harpreet to be partners in a firm such that they share their profits and losses in the ratio 2:1. On 1st April 2023, they decided to admit Rocky as a partner for 1/2th share. He acquires his share from Mohan and Harpreet in the ratio of 3:2. On that date, the Profit and Loss Account had a credit balance of ₹2,40,000, General Reserve amounted to ₹90,000, Workmen Compensation Reserve amounts to ₹39,300, and Deferred Revenue Expenditure was ₹18,900. Assuming that the accounts are closed, you are required to pass the necessary journal entries.

Solution:

Case 2: When Reserves and Accumulated Profit accounts are not closed:

Illustration :

Annie and John are partners in a firm sharing profits and losses equally. On 1st April 2023, they decided to admit Vikram as a partner for 1/5th share and on that date, the Profit and Loss Account showed a credit balance of ₹1,00,000, and the General Reserve amounted to ₹35,500. They decided not to close the accounts. Assuming that the accounts are not closed, you are required to pass the necessary journal entries.

Solution:

Working Notes : 

1. Accumulated Profit = Profit & Loss + General Reserve

= ₹1,00,000 + ₹35,500

= ₹1,35,500

2. Sacrificing ratio of Annie and John will be 1:1

Therefore, Vikram’s Capital A/c will be debited by  share of Accumulated profits, being a gaining partner i.e.,  and he will compensate the sacrificing partners Annie and John in their sacrificing ratio i.e., 1:1 being 13,550 and 13,550, respectively.