How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?
At the time of admission of a new partner, if the firm has accumulated profits or reserves, these belong to the old partners. The new partner is not entitled to any share in such accumulated profits because they were earned prior to his admission.
Accumulated profits usually exist in the form of General Reserve, Reserve, or a credit balance in the Profit and Loss Account. These are distributed among the old partners by transferring the amount to their Capital or Current Accounts in their old profit sharing ratio.
Similarly, the firm may have accumulated losses in the form of a debit balance of Profit and Loss Account or deferred revenue expenditure appearing in the Balance Sheet. The new partner should not bear the burden of these past losses.
Hence, these accumulated losses are also transferred to the old partners' capital accounts in their old profit sharing ratio. This ensures that the new partner does not unfairly benefit from past profits or suffer from past losses.
To conclude, all existing reserves and accumulated profits or losses are adjusted through the old partners' accounts to ensure accurate representation of the firm's financial position at the time of admission.
Explanation
The answer is derived from the 'Adjustment for Accumulated Profits and Losses' section in the provided context. It explains that reserves and accumulated profits (like General Reserve) belong to old partners and are distributed in the old ratio. It also covers accumulated losses (debit balance P&L, deferred revenue expenditure) and mandates their transfer to old partners' accounts in the old ratio to prevent the new partner from sharing in past gains or losses.