Accountancy Part AAdmission of a Partner

When a new partner is admitted, the undistributed profits that appear…

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

Reserves and undistributed profits in the balance sheet were earned before the new partner joined, so he has no claim on them. They are credited to the old partners only, in the ratio in which they shared those profits — the old ratio. The new ratio applies only to profits earned after the admission.

Note: The book's answer key prints “5. (b)” (old partners in new profit sharing ratio) for this item. That is a misprint: the book's own rule on accumulated profits, quoted below, gives the old partners in their old ratio.

NCERT (2026-27 edition):
Test your Understanding – II

Extract from the NCERT textbook

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.”