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

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When the firm is reconstituted 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 reconstitution of the firm (or change in profit-sharing ratio). 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.:

For Transfer of Reserves, Accumulated Profits etc.

 

B. For Transfer of Accumulated Losses:

 For Transfer of Accumulated Losses

 

Illustration 1:

Sushma, Devi, and Radha are partners sharing profit and losses in the ratio 2:3:4. Devi decided to retire, and the remaining partners decided to share their future profits and losses in the ratio of 5:6. On that date, the Profit and Loss Account had a credit balance of ₹12,000, General Reserve amounted to ₹40,000, Workmen Compensation Reserve amounts to ₹70,400, and Advertisement Expenditure is ₹36,000. Pass the necessary journal entries assuming that the accounts are closed.

Solution:

Journal Entries

 

Illustration 2:

Rajesh, Suresh, and Ravi are partners sharing profit and losses in the ratio 3:2:1. Suresh decided to retire, and the remaining partners decided to share their future profits and losses in the ratio of 5:4. On that date, the Profit and Loss Account had a debit balance of ₹24,000, Workmen Compensation Reserve amounted to ₹35,000, Investment Fluctuation Reserve amounts to ₹28,000, and Advertisement Expenditure is ₹30,000. Pass the necessary journal entries assuming that the accounts are closed.

Solution:

Journal Entries

 

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

2. When Reserves and Accumulated Profit accounts are not closed

 

Illustration 1:

Sumit, Hardik, and Harendra are partners sharing profits and losses equally. Harendra decided to retire, and the remaining partners decided to share their future profits and losses in the ratio of 2:1. On that date, the Profit and Loss Account had a credit balance of ₹50,000, and the Workmen Compensation Reserve amounted to ₹20,900. Pass the necessary journal entries assuming that the accounts are not closed.

Solution:

Journal Entries

 

Notes to Accounts:

Accumulated Profits = Profit & Loss A/c + Workmen Compensation Reserve

= 50,000 + 20,900

= 70,900

Sacrificing Ratio = Old Share – New Share

Sacrificing Ratio

 

Sumit will sacrifice 1/3, Hardik will neither sacrifice nor gain, and Harendra will gain 1/3. Hence, Sumit’s Capital will be debited by 1/3rd of the balance of Accumulated Profit; i.e., 70,900\times{\frac{1}{3}}      and Harendra’s Capital will be credited by 1/3rd of the balance of Accumulated Profit; i.e., 70,900\times{\frac{1}{3}}     

Illustration 2:

Ishika, Somya, and Priya are partners sharing profit and losses 3:2:1. Ishika decided to retire, and the remaining partners decided to share their future profits and losses equally. On that date, the Profit and Loss Account had a debit balance of ₹30,000 and the General Reserve amounted to ₹60,000. Pass the necessary journal entries assuming that the accounts are not closed.

Solution:

Journal Entries

 

Notes to Accounts:

Accumulated Profits = Profit & Loss A/c + General Reserve

= (30,000) + 60,000

= 30,000

Sacrificing Ratio = Old Share – New Share

Sacrificing Ratio

 

Ishika will gain 3/6, Somya will sacrifice 1/6, and Priya will sacrifice 1/3. Hence, Ishika’s Capital will be credited by 3/6rd of the balance of Accumulated Profit; i.e., 30,000\times{\frac{3}{6}}    , Somya’s Capital will be debited by 1/6th of the balance of Accumulated Profit; i.e., 30,000\times{\frac{1}{6}}    , and Priya’s Capital will be debited by 1/3rd of the balance of Accumulated Profit; i.e., 30,000\times{\frac{1}{3}}



Last Updated : 05 Apr, 2023
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