Skip to content
Related Articles
Open in App
Not now

Related Articles

Accounting Treatment of Accumulated Profits and Reserves in case of Death of a Partner

Improve Article
Save Article
  • Last Updated : 21 Nov, 2022
Improve Article
Save Article

When the firm is reconstituted all the accumulated profit, reserves and losses are transferred to Partner’s Capital Accounts (if capital is fluctuating) or Current Accounts (if capital is fixed) in their old profit-sharing ratio. This is done because the reserves or accumulated profits/losses belong to the partners before the reconstitution of the firm (or change in profit-sharing ratio). Accumulated profit/losses, and reserves are distributed among the old partners in the old profit-sharing ratio.

Accounting Treatment of Accumulated Profits and Reserves (Journal Entries):

Case 1: When Reserves and Accumulated Profit Accounts are closed:

A. For Transfer of Reserves, Accumulated Profits etc.:

 For Transfer of Reserves, Accumulated Profits etc.

 

B. For Transfer of Accumulated Losses:

For Transfer of Accumulated Losses

 

Illustration 1:

Rahul, Rohan, and Rajesh were partners in a firm sharing profits and losses in the ratio of 3:2:1. On 3rd March 2020, Rohan died, and the new profit-sharing ratio between the remaining partners was decided to 1:1. On the date of death, the Profit & Loss Account had a debit balance of ₹12,000, Workmen Compensation Reserve amounts to ₹20,000, and General Reserve amounted to ₹15,000. Pass the necessary Journal Entries assuming that the books of accounts are closed except Profit and Loss A/c, which was only debited to the deceased partner’s capital a/c.

Solution:

Journal Entries

 

Illustration 2:

Max, Thomas, and John were partners in a firm sharing profits and losses equally. On 13th May 2021, Thomas died, and the new profit-sharing ratio between the remaining partners was decided to 4:5. On the date of death, the Profit & Loss Account had a credit balance of ₹42,000, Advertisement Expenses amounted to ₹15,000, Workmen Compensation Reserve amounts to ₹26,000, and General Reserve amounted to ₹19,000. Pass the necessary Journal Entries assuming that the books of accounts are closed.

Solution:

Journal Entries

 

Case 2: When Reserves and Accumulated Profit accounts are not closed:

2. When Reserves and Accumulated Profit accounts are not closed

 

Illustration 1:

Sally, Sarita, and Swati were partners in a firm sharing profits and losses 3:4:5. On 25th October 2021, Sarita died, and the new profit-sharing ratio between the remaining partners was decided to 6:4. On the date of death, the Profit & Loss Account had a credit balance of ₹55,000, Advertisement Expenses amounted to ₹10,000, Workmen Compensation Reserve amounts to ₹7,000, and General Reserve amounted to ₹23,000. Pass the necessary Journal Entries assuming that the books of accounts are not closed.

Solution:

Journal Entries

 

Notes to Accounts:

Accumulated Profits = Profit & Loss A/c – Advertisement Expenses + Workmen Compensation Reserve + General Reserve

= 55,000 – 10,000 + 7,000 + 23,000

= 75,000

Gaining Ratio = New Share – Old Share

Gaining Ratio

 

Sally will gain 21/60, and Swati will sacrifice 1/60. Hence, Sally’s Capital will be debited by 21/60th of the balance of Accumulated Profit; i.e., 75,000\times\frac{21}{60}    Sarita’s Capital will be credited by 20/60th of the balance of Accumulated Profit; i.e., 75,000\times\frac{20}{60}    and Swati’s Capital will be credited by 1/60th of the balance of Accumulated Profit; i.e., 75,000\times\frac{1}{60}

Illustration 2:

Helen, Tom, and Sejal were partners in a firm sharing profits and losses 2:3:5. On 5th April 2021, Tom died and the new profit-sharing ratio between the remaining partners was decided to 1:1. On the date of death, the Profit & Loss Account had a debit balance of ₹33,000, Workmen Compensation Reserve amounts to ₹40,000, and General Reserve amounted to ₹58,000. Pass the necessary Journal Entries assuming that the books of accounts are not closed.

Solution:

Journal Entries

 

Notes to Accounts:

Accumulated Profits = Profit & Loss A/c + Workmen Compensation Reserve + General Reserve

= (33,000) + 40,000 + 58,000

= 65,000

Gaining Ratio = New Share – Old Share

Gaining Ratio

 

Helen will gain 3/10, Tom will sacrifice 3/10, and Swati will neither sacrifice nor gain. Hence, Helen’s Capital will be debited by 3/10th of the balance of Accumulated Profit; i.e., 65,000\times\frac{3}{10}     and Tom’s Capital will be credited by 3/10th of the balance of Accumulated Profit; i.e., 65,000\times\frac{3}{10}


My Personal Notes arrow_drop_up
Related Articles

Start Your Coding Journey Now!