Accountancy Part AAdmission of a Partner

At the time of admission of a partner following was the extract of Ba…

At the time of admission of a partner following was the extract of Balance Sheet.

Investment fluctuation reserve

₹2,00,000

Investment (market value ₹6,00,000)

₹6,40,000

What entry will be passed?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Investment Fluctuation Reserve A/c Dr. ₹2,00,000 To Investment A/c ₹40,000 To Partners Capital A/c (Old Ratio) ₹1,60,000

An investment fluctuation reserve is kept to meet a fall in the value of investments.

Fall in value = ₹6,40,000 − ₹6,00,000 = ₹40,000, written off against the reserve (credit Investment A/c)

Balance of the reserve = ₹2,00,000 − ₹40,000 = ₹1,60,000

This balance is an accumulated profit of the old firm, so it goes to the old partners in the old ratio; the new partner gets no share of it.

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.”