Accountancy Part AAdmission of a Partner

X and Y are partners in a firm sharing profits in the ratio of 4:1. Z…

X and Y are partners in a firm sharing profits in the ratio of 4:1. Z is admitted in the firm for share. On the admission of Z there was a balance of Rs. 20,000 in general reserve. What would be the journal entry for distributing the reserve.

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → General Reserve a/c Dr Rs. 20,000
To X's Capital A/c Rs.16,000
To Y's Capital A/c Rs. 4,000
(Being Reserve distributed)

The general reserve was built up from profits earned before Z joined, so it belongs only to the old partners. It is closed by crediting X and Y in their old ratio of 4:1; Z gets nothing from it.

X’s share = Rs. 20,000 × 4/5 = Rs. 16,000
Y’s share = Rs. 20,000 × 1/5 = Rs. 4,000

NCERT (2026-27 edition):
Adjustment for Accumulated Profits and Losses – “Sometimes a firm may have accumulated profits not yet transferred to capital accounts of the partners. These are usually in the form of general reserve, reserve and/or Profit and Loss Account. The new partner is not entitled to have any share in such accumulated profits. These are distributed among the partners by transferring it to their capital current accounts in old profit sharing ratio.”

NCERT (2026-27 edition):
Adjustment for Accumulated Profits and Losses

Extract from the NCERT textbook