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Financial Accounting · Admission of Partner

Adjustment of Reserves, Accumulated Profits and Losses on Admission of a Partner

Updated 10 October 2026 · Fact-checked

When a new partner is admitted, general reserve, accumulated profits and accumulated losses belong to the old partners. You transfer them to the old partners' capital accounts in their old profit sharing ratio. Reserves and profits are credited. Losses are debited. The new partner gets no share of them.

Understand Adjustment of Reserves, Accumulated Profits and Losses

A firm may hold a general reserve, a credit balance in Profit and Loss A/c, or a debit balance in Profit and Loss A/c (accumulated loss). These were built up or suffered before the new partner joined. So they belong to the old partners.

The new partner will pay for his share of past profits through goodwill, not through reserves. If you leave a reserve in the balance sheet, the new partner would share in it when it is later distributed. That is unfair to the old partners. So you distribute it at the time of admission.

The ratio used is the old ratio, because the old partners earned or lost these amounts under that ratio. The new ratio applies only from the date of admission.

The same idea covers other items such as Workmen Compensation Reserve, Investment Fluctuation Reserve and Deferred Revenue Expenditure (for example, advertisement suspense). Each is shared by the old partners in the old ratio, with one exception: a liability that exists (for example, a Workmen Compensation claim) stays as a liability to the extent of the claim, and only the excess reserve is distributed.

A reserve may be left in the books only if the partners agree and the new partner is told. Then you make no entry, and you must show it as an adjustment in the question's note. Unless the question says so, distribute it.

Key rules to remember

Reserve or profit entry
General Reserve A/c (or P&L A/c) Dr. ; To Old partners' Capital A/cs (old ratio)
Applies to any credit balance that is not a liability: general reserve, other free reserves, credit balance of P&L A/c.
Accumulated loss entry
Old partners' Capital A/cs (old ratio) Dr. ; To Profit and Loss A/c (debit balance)
Also use this for deferred revenue expenditure not yet written off, such as advertisement suspense.
Share of each old partner
Share = Amount × Old ratio share of that partner
Use old ratio only. Never use the new ratio or the sacrificing ratio.
Reserve against a liability
Amount distributed = Reserve balance − Actual liability or claim
Example: Workmen Compensation Reserve ₹50,000 and claim ₹30,000. Distribute ₹20,000 and show the claim as a liability.

How to solve Adjustment of Reserves, Accumulated Profits and Losses questions

Use this method for any question on reserves, profits and losses at admission.

  1. 1List every reserve, credit balance of P&L A/c and debit balance of P&L A/c or fictitious asset in the old balance sheet.
  2. 2Find the old ratio from the question. If only the new ratio and sacrifice are given, work back to the old ratio.
  3. 3Check each reserve for a matching liability. Keep the liability and distribute only the excess.
  4. 4Pass the journal entry. Credit balances: debit the reserve, credit old partners' capital. Debit balances: debit old partners' capital, credit the loss.
  5. 5Show each partner's share in the narration or in a working note, in the old ratio.
  6. 6Post to the capital accounts and show reserves as nil in the new balance sheet.
  7. 7If the question says the reserve stays, make no entry and disclose it in the new balance sheet.

Quickest way: Net transfer in one line

When to use it: Use when the question gives several reserves and losses together and you are short of time.

  1. Add all credit items (reserves and P&L credit) and subtract all debit items (P&L debit and fictitious assets).
  2. Treat the net figure as one amount to be shared in the old ratio.
  3. Compute each old partner's share and add it to his capital as one line in the capital account.
  4. Still write the separate journal entries in the answer, since step marks are given for them.

Common mistakes in Adjustment of Reserves, Accumulated Profits and Losses

  • Sharing the reserve in the new ratio.

    Students see the new partner on the balance sheet and include him.

    Fix: The reserve belongs to the old partners. Use the old ratio only and give the new partner nothing.

  • Using the sacrificing ratio instead of the old ratio.

    Sacrificing ratio is used in the same chapter for goodwill, so the two get mixed up.

    Fix: Sacrificing ratio is only for goodwill. Reserves and accumulated profits always go in the old ratio.

  • Debiting old partners' capital for a reserve.

    Students confuse the direction of the entry.

    Fix: A reserve is a credit balance. Debit the reserve to close it and credit the partners' capital.

  • Distributing a reserve that is covering a liability.

    The word reserve is taken to mean free profit.

    Fix: Read the question for a claim or contingent loss. Distribute only the excess and keep the liability.

  • Forgetting to write off a debit balance of P&L A/c.

    Students look only at reserves and credit balances.

    Fix: Check the debit side of the balance sheet. Charge accumulated losses to old partners in the old ratio.

Worked examples

Example 1

A and B share profits in the ratio 3:2. Their balance sheet shows General Reserve ₹50,000 and Profit and Loss A/c (credit) ₹30,000. They admit C for 1/5 share. Pass the journal entries for the reserve and profit and loss balance, and show the shares of A and B.

Show the solution
  1. Old ratio = 3:2. Total to distribute = ₹50,000 + ₹30,000 = ₹80,000.
  2. General Reserve: A = ₹50,000 × 3/5 = ₹30,000. B = ₹50,000 × 2/5 = ₹20,000.
  3. Profit and Loss A/c: A = ₹30,000 × 3/5 = ₹18,000. B = ₹30,000 × 2/5 = ₹12,000.
  4. Entry 1: General Reserve A/c Dr. ₹50,000; To A's Capital A/c ₹30,000; To B's Capital A/c ₹20,000.
  5. Entry 2: Profit and Loss A/c Dr. ₹30,000; To A's Capital A/c ₹18,000; To B's Capital A/c ₹12,000.
  6. Total credit to A = ₹48,000. Total credit to B = ₹32,000. Check: ₹48,000 + ₹32,000 = ₹80,000.

Answer: A's capital is credited ₹48,000 and B's capital is credited ₹32,000. C receives nothing.

Example 2

X, Y and Z share profits in the ratio 5:3:2. Their balance sheet shows General Reserve ₹1,00,000, Workmen Compensation Reserve ₹60,000 and Profit and Loss A/c (debit) ₹40,000. A claim of ₹45,000 on workmen compensation is expected. They admit W. Pass the journal entries.

Show the solution
  1. Old ratio = 5:3:2.
  2. Workmen Compensation Reserve ₹60,000 less claim ₹45,000 = excess ₹15,000 to distribute. The claim ₹45,000 stays as a liability.
  3. General Reserve ₹1,00,000: X = ₹50,000, Y = ₹30,000, Z = ₹20,000.
  4. Excess Workmen Compensation Reserve ₹15,000: X = ₹7,500, Y = ₹4,500, Z = ₹3,000.
  5. Entry 1: General Reserve A/c Dr. ₹1,00,000; Workmen Compensation Reserve A/c Dr. ₹15,000; To X's Capital A/c ₹57,500; To Y's Capital A/c ₹34,500; To Z's Capital A/c ₹23,000. (The ₹45,000 balance of the reserve stays as the liability for the claim.)
  6. Loss ₹40,000: X = ₹20,000, Y = ₹12,000, Z = ₹8,000.
  7. Entry 2: X's Capital A/c Dr. ₹20,000; Y's Capital A/c Dr. ₹12,000; Z's Capital A/c Dr. ₹8,000; To Profit and Loss A/c ₹40,000.
  8. Net effect: X = ₹57,500 − ₹20,000 = ₹37,500 credit. Y = ₹34,500 − ₹12,000 = ₹22,500 credit. Z = ₹23,000 − ₹8,000 = ₹15,000 credit.

Answer: Net credit to capital: X ₹37,500, Y ₹22,500, Z ₹15,000. Total ₹75,000 = ₹1,00,000 + ₹15,000 − ₹40,000. The ₹45,000 claim remains as a liability.

Exam tips

  • Write the old ratio at the top of your answer. Examiners look for it, and it prevents the new-ratio error.
  • In MCQs, check whether the question says the reserve is to remain in the books. If so, the capital accounts do not change.
  • Look for hidden items: Workmen Compensation Reserve with a claim, Investment Fluctuation Reserve, advertisement suspense, and preliminary expenses. Treat each correctly.
  • Pass the entries separately for each item in the written answer, then show a working note for each partner's share to earn step marks.
  • Verify at the end that total debits to capital equal the total credits from reserves.

Practice questions from Admission of Partner

Adjustment of Reserves, Accumulated Profits and Losses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Adjustment of Reserves, Accumulated Profits and Losses: frequently asked questions

In which ratio is general reserve distributed on admission of a partner?

It is distributed among the old partners in their old profit sharing ratio. The new partner has no share in it. The reason is that the reserve was built up before he joined.

What is the journal entry for general reserve on admission?

General Reserve A/c Dr.; To Old partners' Capital A/cs. The amount credited to each partner is the reserve multiplied by his old ratio share.

How do you treat a debit balance of Profit and Loss A/c on admission?

It is an accumulated loss. Debit the old partners' capital accounts in the old ratio and credit Profit and Loss A/c. The new partner does not bear any part of it.

What if the reserve is not distributed on admission?

This is allowed only if the partners agree. No entry is made, and the reserve stays in the new balance sheet. Later, the new partner will also share in it, so the question must state this clearly.