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Adjustments of Reserves and Accumulated Profits or Losses

At the time of admission of a new partner, if there exists any reserves or accumulated profits in the books of the firm, they should be transferred to the old partners’ capital/current accounts in the old profit sharing ratio, because these items belong to the old partners and not to the new partner.


In the same manner, old partners’ capital/current accounts should be debited in the old ratio if any accumulated loss appears in the assets side of the balance sheet. The journal entries are as follows:


However, all the partners (including the new partner) may also decide to show the reserves in the books at its original or some agreed value. In such a situation, all partners’ capital accounts are debited in the new profit sharing ratio and reserves are credited at the agreed value. The journal entry is as follows:



Illustration 10


W, X and Y are partners in a firm sharing profits and losses in the ratio 2:2:1. Their balance sheet as on 31st March 2014 is as follows:

The partners have agreed to take Mr. Z as a partner with effect from 1st April 2012 on the following terms:

  • Mr. Z shall bring ₹ 10,000 towards his capital.
  • The value of the stock should be increased by ₹ 5,000 and furniture should be depreciated by 10 per cent.
  • Reserve for bad and doubtful debts should be provided at 10 per cent of the debtors.
  • The value of land and buildings should be enhanced by 20 per cent.
  • The value of the goodwill should be fixed at ₹ 30,000.
  • General reserve will be transferred to the partners’ capital accounts.
  • The new profit sharing ratio shall be: Mr. W: 5/15; Mr. X: 5/15; Mr. Y: 3/15; and Mr. Z 2/15.
  • The outstanding liabilities include ₹ 2,000 due to Mr. P which has been paid by Mr. W. Necessary entries were not made in the books.
Prepare a revaluation account and the capital accounts of the partners.


Hence, Sacrifice by Mr W and Mr X
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Proportionate Capital and Inference of Goodwill

Proportionate capital means the capital account balances of partners in accordance with the profit sharing ratio. It is maintained generally under the ‘fixed capital method’.


Illustration 11


X and Y are in a partnership, sharing profits and losses equally. The balance sheet of M/s X and Y as on 31st March 2014 was as follows:


On 1st April 2014, they agreed to take Z as a partner for 1/3rd the share, to increase the capital base to ₹ 2,70,000. Z agreed to pay ₹ 1,20,000. Show the necessary journal entries and Partners’ Capital accounts.




In the Books of M/s X, Y and Z


Journal Entries



Working Notes:


Old profit sharing ratio—1:1


New profit sharing ratio—1:1:1


Z’s share of capital—₹ 2,70,000 × 1/3 = ₹ 90,000


Goodwill—₹ 1,20,000 - ₹ 90,000 = ₹ 30,000 for 1/3rd the share


Total goodwill—₹ 30,000 × 3 = ₹ 90,000


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