Introduction
In this article we will discuss the adjustment for accumulated profits and losses at the time of reconstitution in Partnership accounts
Adjustment for accumulated profits and losses is done at the time of admission, retirement, death and change in profit sharing ratio among the partners.
Reserves and Accumulated Profits meaning
These are basically a portion of profits earned by the partnership firm in the past years. This portion of profits was not distributed among the partners and was kept for future use.
Accumulated profits include the following:
- All kinds of reserves like
- contingency reserve,
- general reserve,
- investment fluctuation reserve,
- workmen compensation reserve,
- reserve fund,
- surplus,
- credit balance in profit and loss account.
All the reserves and accumulated profits are written on the liabilities side of the balance sheet
Accumulated Losses meaning
Accumulated losses are expenses which are not yet fully written off. Fully written off means these are not yet fully transferred to profit and loss account.
- Accumulated losses include:
- debit balance in profit and loss account,
- deferred revenue expenditure,
- advertisement expenditure
These are also known as fictitious assets.
All the accumulated losses are written on the assets side of the balance sheet
Accounting for accumulated profits and losses
There can be two methods for accounting for accumulated profits and accumulated losses.
- First. Where accumulated profits and losses are not shown in the new balance sheet after reconstitution.
- Second. Where accumulated profits and losses are shown in the new balance sheet after reconstitution
We will discuss both of these methods one by one
Method 1
We will start with method 1 where accumulated profits and losses are not shown in the new balance sheet after reconstitution. The accounting for this case is simple.
All the accumulated profits and losses will be distributed among the partners as follows :
| Reconstitution Type | Partners | Ratio |
| Change in Profit sharing ratio | All Partners | Old Ratio |
| Admission of a new partner | Old Partners | Old Ratio |
| Retirement of a partner | All Partners | Old Ratio |
| Death of a partner | All Partners | Old Ratio |
Journal entry for distribution of reserves and accumulated profits
- Respective reserve account Dr..
- To Partner's Capital A/c
Respective reserve means that if the question gives general reserve then general reserve account gets debited. If the question gives contingency reserve then contingency reserve account gets debited. Similarly for other reserves.
Reserve account is debited as there is decrease in reserve which gets debited.
Partner's are getting money, so their capital account is increasing and hence credited.
Depending upon the type of reconstitution, either the old partners, or all the partner's capital account gets credited.
Workmen compensation reserve and investment fluctuation reserve involves different case scenarios and hence are discussed in separate article.
Journal entry for distribution of accumulated losses
- Partner's Capital A/c Dr..
- To Respective accumulated loss A/c
Partner capital account is debited because they are getting a share in losses. Due to loss, their capital is decreasing. Decrease in capital is debited and so partner capital account gets debited.
Depending upon the type of reconstitution, either the old partners, or all the partner's capital account gets debited.
Example question on reserves on admission of a partner
Aman, Suman and Naman are partners sharing profits equally. They admitted daman as a new partner for one fourth share in profits with effect from 1st April. Their balance sheet as on 31st March is as follows
| Liabilities | Amount | Assets | Amount |
| Aman Capital | 10000 | Buildings | 15000 |
| Suman Capital | 10000 | Machinery | 16000 |
| Naman Capital | 10000 | Investments | 16000 |
| General Reserve | 3600 | Profit and Loss Account | 1800 |
| Contingency Reserve | 4500 | Deferred Revenue Expenditure | 1200 |
| Reserve Fund | 900 | ||
| Sundry Creditors | 11000 | ||
| Total | 50000 | Total | 50000 |
Solution to example question
Accumulated profits are written on the liabilities side of balance sheet. In this question accumulated profits are, first, general reserve, second, contingency reserve, third, reserve fund.
Accumulated losses are given on the assets side of the balance sheet. In this question accumulated losses are Profit and loss account debit balance and deferred revenue expenditure.
Treatment of accumulated profits
First we discuss the treatment for accumulated profits. These will be distributed among the old partners in the old ratio. The journal entry will be,
| General Reserve A/c Dr.. | 3600 |
| Contingency Reserve A/c Dr.. | 4500 |
| Reserve Fund A/c Dr.. | 900 |
| To Aman Capital A/c | 3000 |
| To Suman Capital A/c | 3000 |
| To Naman Capital A/c | 3000 |
Total reserves to be distributed are nine thousand rupees. This gets distributed among old partners in their profit sharing ratio of one is to one is to one.
As the profits are distributed among the partners, so their capital will increase. Increase in capital is credited.
Treatment of accumulated losses
Next, we discuss the treatment for accumulated losses. These will also be distributed among the old partners in the old ratio.
The journal entry will be
| Aman Capital A/c Dr.. | 1000 |
| Suman Capital A/c Dr.. | 1000 |
| Naman Capital A/c Dr.. | 1000 |
| To Profit and Loss A/c | 1800 |
| To Deferred Revenue Expenditure A/c | 1200 |
Total accumulated losses distributed are three thousand rupees. This gets distributed among old partners in their profit sharing ratio of 1 : 1 : 1. As the losses are distributed among the partners, so their capital will decrease. Decrease in capital is debited.
Accumulated Profits and Losses in partner capital A/c
Next we will discuss the treatment in the partner capital account.
Distribution of accumulated profits will increase the partners capital. So it will be shown on the credit side of partner capital account.
Distribution of accumulated losses will decrease the partners capital. So it will be shown on the debit side of partner capital account.
In the example question,
On the credit side of partner capital account, we will write, distribution of each reserve separately. On the debit side of partner capital account, we will write, distribution of each accumulated loss separately.
After that we will calculate the revised balances in each partner capital account after taking the impact of distribution of accumulated profits and losses. These revised balances will be shown in the new balance sheet.
PARTNER'S CAPITAL A/C
| Particulars | Aman | Suman | Naman | Particulars | Aman | Suman | Naman |
| By Balance B/d | 10000 | 10000 | 10000 | ||||
| To Profit and Loss A/c | 600 | 600 | 600 | By Contingency Reserve | 1200 | 1200 | 1200 |
| To Deferred Revenue Expenditure | 400 | 400 | 400 | By General Reserve | 1500 | 1500 | 1500 |
| By Reserve Fund | 900 | 900 | 900 | ||||
| To Balance C/d | 12600 | 12600 | 12600 | ||||
| Total | 13600 | 13600 | 13600 | Total | 13600 | 13600 | 13600 |
Accumulated Profits and Losses in Balance Sheet
In the new or revised balance sheet the accumulated profits or accumulated losses will not come. This is due to the fact that we have already distributed all the accumulated profits and losses among the partners. Now nothing is left in the accumulated profits or accumulated losses account.
The new balances of partners capital accounts as calculated on previous slide will come in the new balance sheet after the admission of new partner.
Conclusion
In this article, we have discussed the method where accumulated profits and losses does not come in the new or revised balance sheet.
In the next article, we will discuss the method 2, where the balances of accumulated profits and losses continue to appear in the new balance sheet.
Please note that if the question is silent, then we will solve the question as per method 1 discussed in this article.
Coming Soon