Adjustment of Reserves, Accumulated Profits and Losses, and Capital Accounts

Besides revaluing assets and liabilities, the firm's Balance Sheet may also carry accumulated reserves (such as a General Reserve or Reserve Fund) or an undistributed credit/debit balance in the Profit and Loss Account from earlier years. These represent profits (or losses) that belong to the partners but have simply not yet been transferred to their individual capital accounts.

Before the outgoing partner's account can be finally settled, all such balances must be cleared out of the books and distributed among ALL the partners (again including the outgoing one) in the OLD ratio — exactly the same principle as for revaluation, and for the same reason: these amounts relate to the period before the reconstitution.

• A General Reserve or credit balance in P&L A/c is credited to each partner's capital account in the old ratio.
• A debit balance (accumulated loss) in P&L A/c is debited to each partner's capital account in the old ratio. …