When a new partner is admitted, undistributed profits (reserves and accumulated profits) shown in the balance sheet belong to the old partners only. These profits were earned during the period when only the old partners were managing the firm, and the new partner has no claim over them.
Therefore, these undistributed profits must be transferred to the capital accounts of the old partners in their old profit sharing ratio (the ratio that existed before admission).
Journal Entry:
Undistributed Profits A/c ... Dr
To Old Partners' Capital A/cs (in old ratio)
For example, if partners A and B share profits in the ratio 3:2, and there are undistributed profits of ₹50,000, this amount will be distributed as:
- A's share = ₹50,000 × 53 = ₹30,000
- B's share = ₹50,000 × 52 = ₹20,000
The new partner gets no share in these past profits since they were not part of the firm when these profits were earned.