When a new partner is admitted, the undistributed profits that appear in the balance sheet of the old firm are transferred to the capital account of:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Old partners in old profit sharing ratio
When a new partner is admitted, the undistributed profits or reserves appearing in the firm’s Balance Sheet (like General Reserve or Profit & Loss Credit balance) represent profits earned by old partners before the new partner’s admission. Hence, these accumulated profits belong exclusively to the old partners and must be divided among them in their old profit-sharing ratio, before the new partner is admitted.