If, at the time of admission of a new partner, profit and loss account appears in the books, it will be transferred to:
If, at the time of admission of a new partner, profit and loss account appears in the books, it will be transferred to:
Solution
When a new partner is admitted to the firm, any balance appearing in the Profit and Loss Account represents accumulated profits or losses from past periods. This balance belongs exclusively to the old partners because:
The new partner is entitled to share profits only from the date of admission onwards, not for the period before joining the firm.
Past profits or losses were earned or incurred when only the old partners were running the business.
Treatment:
The Profit and Loss Account balance is transferred to the Old Partners' Capital Accounts in their old profit-sharing ratio.
Journal Entry:
For Profit balance (credit side):
Profit and Loss A/c ... Dr
To Old Partners' Capital A/cs
For Loss balance (debit side):
Old Partners' Capital A/cs ... Dr
To Profit and Loss A/c
This transfer must be done before recording the new partner's capital and making any other adjustments (like revaluation, goodwill, etc.). This ensures that the new partner doesn't get any share in profits or losses that existed prior to their admission.
The new partner will share in profits earned only after the date of admission as per the new profit-sharing ratio agreed upon.
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