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:

Undistributed profits (such as General Reserve, Profit & Loss A/c credit balance, or any accumulated profits) appearing in the balance sheet represent earnings that were generated when all the old partners were actively part of the firm.

Since these profits were earned during the period when the old partnership existed, they rightfully belong to all the old partners who contributed to earning them. This includes both the continuing partners and the retiring partner.

The distribution must be done in the old profit sharing ratio because this was the agreed ratio when these profits were originally earned and retained in the business.

Journal Entry:

Undistributed Profits A/c (or Reserve A/c/Profit & Loss A/c) ... Dr.

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

For example, if partners A, B, and C share profits as 3:2:1 and partner C retires, any undistributed profit of ₹60,000 will be distributed as:

• A's Capital A/c: ₹30,000 (3/6)
• B's Capital A/c: ₹20,000 (2/6)
• C's Capital A/c: ₹10,000 (1/6)

This ensures the retiring partner receives their fair share of accumulated profits before leaving the firm, and the continuing partners also get their respective entitlements from past earnings.