At the time of admission of a partner, undistributed profits appearing in the balance sheet of the old firm is transferred to the capital account of:
At the time of admission of a partner, undistributed profits appearing in the balance sheet of the old firm is transferred to the capital account of:
Solution
Undistributed profits (such as General Reserve, Profit & Loss Account credit balance, or any other reserves) represent profits earned by the firm before the new partner's admission. Since the new partner has not contributed to earning these profits, they belong exclusively to the old partners.
These accumulated profits must be distributed among the old partners only in their old profit sharing ratio (the ratio in which they were sharing profits before admission).
Journal Entry:
Reserves/Undistributed Profits A/c Dr.
To Old Partners' Capital A/cs (in old ratio)
Why not the other options?
The new profit sharing ratio will apply only to profits earned after the admission date. Past accumulated profits cannot be shared with the new partner as they were not part of the firm when these profits were earned.
Similarly, these profits cannot be distributed in any ratio involving the new partner (Options 3 and 4) or in the new profit sharing ratio among old partners (Option 2), as this would give either the new partner an undue advantage or alter the old partners' rightful shares in their past earnings.
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