In which ratio reserves and accumulated profit will be distributed at the time of addmission of a new partner
Answers
ANSWER :
★ Old Profit Sharing Ratio of the existing partners.
- ✎ In the Old Profit Sharing Ratio of the existing partners, reserves and accumulated profit will be distributed at the time of addmission of a new partner among the old partners.
___________________________________________________________
EXPLANATION :
At the time of admission of a partner, if there is any Reserve Fund or accumulated (distributed) profits appearing on the Liabilities side of the Balance Sheet or losses appearing on the Assets side of the Balance Sheet; it indicates that the amounts are not yet transferred to the Capital Accounts of the old partners.
Since such reserves were created out of profits and such profits were earned or losses were incurred before the admission of the new partner; hence the new partner can neither claim any share in the distributed reserves and accumulated profits nor will bear any portion of the undistributed losses.
- ✠ Therefore, at the time of admission of the new partner, the distribution of reserve and accumulated profits (or undistributed losses) is made by transferring the amounts to the Capital Accounts of the old partners in their Old Profit Sharing Ratio.
On account of distribution of reserve and accumulated profits, the Capitals of the partners will increase. On the other hand, on transfer of undistributed losses, the Capitals of the partners will decrease.