Adjustment for Accumulated Profits and Losses

The answer to the question, define accumulated profits and losses is quite simple. It is the retained revenue of the company left after paying the dividends. These accumulated profits or losses need to distribute among the old partners in their old profit sharing ratio to their capital accounts. 

In other words, we can say that, at the time of admission of any new partner in the firm, there are some accrued profits not yet transferred to the capital accounts of the old partners (including any general reserve, reserve fund, or the balance of profit), then these accumulated losses like the debit balance of profit and loss account, advertisement suspense, etc. debit from the old partner’s capital account in the old profit sharing ratio. If the firm has some specific reservations such as Investment Fluctuation Reserve to meet future obligations, then these will also transfer to the capital accounts of old partners in the same old profit sharing ratio.

Journal Entries for the Distribution of Profits among Old Partners in their Old Profit sharing Ratio

Journal entry for the distribution of Reserves and Accumulated Profits: 

General Reserve A/c                                  Dr.

Reserve Fund A/c                                       Dr.

Profit & Loss A/c (credit balance)            Dr.

              To     Old Partner’s Capital A/c

• For the distribution of these accumulated losses in their old ratio among the old partners.

Suppose, there is an accumulated loss like advertisement expense or Deferred revenue expenditure, then the journal entries shall be:

Old Partner’s Capital A/c                           Dr.

                To profit & loss A/c (debit balance)

                To Advertisement Suspense A/c  

                To deferred revenue expenditure A/c

Journal entries for the distribution of Surplus of specific revenues:

Suppose, the firm has some specific revenues for the future like Workmen’s compensation reserve, then the entries shall be as follows:

Workman’s Compensation Reserve A/c             Dr.

Investment Fluctuation Reserve A/c                     Dr.

             To Old Partner’s Capital A/cs

Example of Adjustments of accumulated profits or losses 

Example-

Jessica and Phoebe were partners in a firm sharing the profits and losses in the ratio 2:1. Mikasa was admitted as the new partner of Phoebe and Jessica from April 1st 2021. On the date of Mikasa’s admission the balance sheet of Jessica and Phoebe showed a balance of ₹2,40,000 in general reserve, ₹1,80,000 in profit and loss account ( credit balance ). What will be the necessary journal entries for treating these items on Mikasa’s admission? The new profit sharing ratio between Jessica, Phoebe and Mikasa are 6:3:1. 

Solution: 

JOURNAL

Methods of Calculation of Workmen’s Compensation Reserve in Different Conditions

The workmen’s compensation reserve is out of the firm’s profits i.e. compensation paid to the employee. The methods of accumulated profits and losses of workmen’s compensation reserve are as follows:

1. If the workmen’s compensation reserve does not have any claims: In a case where workmen compensation reserve does not hold any claims then the entire amount of workmen compensation is credited to the capital accounts of the old partners of the firm. This credit is according to their old profit sharing ratio before the admission of any partner. 
2. If the claim for workmen’s compensation is lower than the amount of workmen compensation reserve: If the claim for workmen’s compensation is lower than the amount of workmen compensation reserve, then the number of claim credits in the ‘Provision for workmen’s compensation claim A/c’ whereas the balance credits to workmen compensation reserve. 
3. If the claim for workmen compensation is equal to the workmen compensation itself: If the claim for workmen compensation is equal to the workmen compensation itself then the entire amount credits in the provision for workmen compensation A/c.
4. If the claim for workmen’s compensation is greater than the amount of workmen compensation reserve: In such cases, the entire workmen compensation reserve (including the claim) credits in the ‘Provision for Workmen Compensation claim A/c’. Moreover, the amount of excess claim debits to the ‘Revaluation Account’. It is so because the loss must be borne out of all old partners in their old profit sharing ratio. 

Conclusion

Adjustment of accumulated profit and losses is the retained capital that an enterprise’ is left with after paying all the dividends. The methods of accumulated profits and losses are essential to calculate profit or loss at the end of an accounting period. This profit will be further distributed among the old partners of the firm in their old profit sharing ratio. Journal Entries for the Distribution of Profits among Old Partners in their Old Profit sharing Ratio varies slightly as stated above. For the calculation of accumulated profits, the accumulated profit beginning of the year has to deduct from cash dividends and stock dividends. There are different methods of calculation of workmen’s compensation in different conditions.