Occasionally, a company's Balance Sheet may reflect accumulated profits in the form of a general reserve or reserve fund, and accumulated losses in the form of a debit balance in the profit and loss account. The outgoing or deceased partner is entitled to his or her share in the accumulated profits, and is also liable to share the accumulated losses. These accumulated profits or losses are divided among the partners and should be transferred to the partners' capital accounts according to their original profit sharing ratio.
The following are the journal entries recorded for this process:
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For accumulated profits, the accounting treatment is to credit the old partner’s capital account
Reserves A/c Dr. Profit & Loss A/c Dr. To Old Partner’s Capital A/c (Individually) |
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For accumulated loss, the accounting treatment is to debit the capital account of old partner’s.
Old Partner’s Capital A/c Dr. (Individually) To Profit and Loss A/c (Loss) |