At the time of retirement 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 retirement 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, Reserve Fund, or credit balance in Profit and Loss Account represent profits that were earned by the firm during the period when all the old partners (including the retiring partner) were active in the business.
Since these profits accumulated during the tenure of all old partners, they must be distributed among all old partners in their old profit sharing ratio. The retiring partner has an equal claim to these accumulated profits along with the continuing partners.
Journal Entry:
Undistributed Profits A/c (Reserve/General Reserve/P&L A/c) Dr.
To All Partners' Capital A/cs (in old ratio)
For example, if partners A, B, and C share profits in the ratio 3:2:1 and B retires, any undistributed profits will be distributed in 3:2:1 to A, B (retiring partner), and C respectively.
This treatment differs from goodwill, which is distributed only to continuing partners, and revaluation gains/losses, which are also shared in the old ratio but serve a different purpose. The sacrificing ratio is used only for distributing the retiring partner's share of goodwill among continuing partners, not for undistributed profits.
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