Adjustment for Accumulated Profits and Losses – Method 2

Introduction

This article is the continuation of previous article on accounting for accumulated profits and losses in partnership accounts. In the previous article we have discussed method 1, where accumulated profits and losses does not appear in the new balance sheet. In this article we will discuss method 2 where accumulated profits and losses continue to appear in the new balance sheet.

Types of language in question

There can be various kinds of languages for this method in the question.

First. Accumulated profits and losses continue to appear in the new balance sheet

Second. Adjustment for accumulated profits and losses to be done without affecting their book values

Third. Accumulated profits and losses continue to appear at their old book values in the new balance sheet

Accounting treatment in Method 2

Journal Entries

In this method we will not pass journal entries in the respective reserve accounts. This is because the questions says that reserves should continue to appear in the new balance sheet.

Let's discuss the accounting treatment under this method step by step. We will discuss the same question we discussed in previous article. The question we discussed in previous article related to admission of a new partner is given again here for reference.

Example question 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

Step 1

First add all the items of accumulated profits and reserves which appear on the liabilities side. In our example we will add the following,

General Reserve	3600
Contingency Reserve	4500
Reserve Fund	900
Total	9000

Step 2

Next we will add all the items of accumulated losses which appear on the assets side.

Profit and Loss Debit Balance	1800
Deferred Revenue Expenditure	1200
Total	3000

Step 3

In this step find the difference between total accumulated profits and reserves as per step 1, and accumulated losses as per step 2.

In our example the difference will be Rs 9000 minus Rs 3000, equals Rs 6000.

• Now there can be two cases
  • Case 1. Accumulated profits and reserves > accumulated losses
  • Case 2. Accumulated profits and reserves < accumulated losses

In our example since accumulated profits and reserves (Rs 9000) are greater than accumulated losses (Rs 3000), so it is case 1.

Step 4

Find the gaining and sacrificing ratio among the partners. In our example, the new partner admitted will be the gaining partner. The old partners will be sacrificing partners with sacrificing ratio of 1 : 1 : 1

Journal Entry

Now we will pass the journal entry. In case 1, the journal entry will be 

• Gaining Partner Capital A/c Dr..
  • To Sacrificing Partner Capital A/c

In case 2, the journal entry will be 

• Sacrificing Partner Capital A/c Dr..
  • To Gaining Partner Capital A/c

Amount in both the cases will be as per the gaining and sacrificing ratio calculated in previous step.

Let's make journal entry in our example. First we calculate the amount for the journal entry. New partner Daman has gained one fourth share in profits. New partner has gained Rs 6000 X 1/4 = Rs 1500. This amount is sacrificed by old partners in the ratio of 1 : 1 : 1. Thus amount sacrificed by each old partner as per the sacrificing ratio is Rs 500.

Journal Entry

Daman Capital A/c Dr..	1500
To Aman Capital A/c	500
To Suman Capital A/c	500
To Naman Capital A/c	500

Partner Capital A/c

Now we discuss the impact in partner capital account. For the partners whose account is debited in journal entry, the entry will be made on debit side of their capital account. For the partners whose account is credited in journal entry, the entry will be made on credit side of their capital account.

PARTNER'S CAPiTAL A/C

Particulars	Aman	Suman	Naman	Daman	Particulars	Aman	Suman	Naman	Daman
To Aman Capital				500	By Balance B/d	10000	10000	10000
To Suman Capital				500	By Daman Capital	500	500	500
To Naman Capital				500
To Balance C/d	10500	10500	10500
Total		13600	13600	13600	Total		13600	13600	13600

Conclusion

In this method we have not touched the reserves, accumulated profits and accumulated losses account. So these accounts will continue to appear as it is in the new balance sheet after the reconstitution.