Book-Keeping and Accountancy · Ch 3 — Reconstitution of Partnership (Admission of Partner)
Adjustment of Accumulated Profits, Reserves and Partners' Capital
Adjustment of Accumulated Profits, Reserves and Partners' Capital
Two further items must be settled before, or at the same time as, a new partner is admitted.
Accumulated profits, reserves and losses
A firm's Balance Sheet, just before admission, may already show items such as General Reserve, a credit balance of Profit and Loss Account, or a Workmen Compensation Reserve — profits earned and set aside in years BEFORE the new partner joined. Since these belong entirely to the period before admission, they are distributed to the OLD partners' capital accounts, in their OLD profit-sharing ratio, and disappear from the Balance Sheet before the new firm's position is drawn up.
| Item | Journal Entry (distributed to old partners in old ratio) |
|---|---|
| General Reserve (credit balance) | General Reserve A/c ...Dr To Old Partners' Capital A/cs |
| Profit and Loss A/c (credit balance) | Profit and Loss A/c ...Dr To Old Partners' Capital A/cs |
| Profit and Loss A/c (debit balance, i.e. accumulated LOSS) | Old Partners' Capital A/cs ...Dr To Profit and Loss A/c |
Adjustment of partners' capital
Sometimes the partners further agree that, after all the above adjustments, the capitals of ALL the partners (old and new alike) should stand in proportion to the new profit-sharing ratio.
Adjustment of Capital on Admission
Bringing every partner's capital balance, after goodwill, revaluation and reserve adjustments, into proportion with the new profit-sharing ratio — any partner whose capital exceeds the required figure withdraws the excess, and any partner short of it brings in the difference.
This is done by first fixing one partner's capital as the base (very often the new partner's own capital, since that is usually a figure stated outright in the question), and then computing what each of the other partners' capitals SHOULD be in the new ratio. …
Bringing every partner's capital balance, after goodwill, revaluation and reserve adjustments, into proportion with the new profit-sharing ratio — any excess is withdrawn and any shortfall is b …