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:

When a new partner is admitted, any undistributed profits, reserves, or accumulated profits appearing in the balance sheet belong exclusively to the old partners. These amounts represent profits earned during the period when only the old partners were running the business.

Since the new partner has no right over profits earned before their admission, these undistributed profits must be distributed among the old partners before the new partner joins.

The distribution is done in the old profit sharing ratio because this ratio reflects how the old partners were sharing profits during the period when these undistributed profits were earned.

Journal Entry:

Undistributed Profits A/c ... Dr.

To Old Partners' Capital A/cs (in old ratio)

For example, if A and B are partners sharing profits 3:2 and there are undistributed profits of ₹50,000:

• A's Capital A/c will be credited with ₹30,000 (3/5 × 50,000)
• B's Capital A/c will be credited with ₹20,000 (2/5 × 50,000)

This ensures that the new partner doesn't get an undue advantage by sharing in profits they didn't help earn. The same treatment applies to General Reserve, Workmen Compensation Reserve, Investment Fluctuation Reserve, and any other accumulated profits or reserves.