(1) If partners decide to share the existing profits/losses, following journal entry is to be passed:
Accumulated Profits account Dr. (by the name of the account)
To All partners’ Capital accounts (in their old profit sharing ratio)
(Being the accumulated profits shared by the partners in their profit sharing ratio)
(2) If the partners decide not to share these profits
or
they don’t want to disturb the existing profits
or
they want to make an adjustment through capital accounts regarding these profits;
following adjustment entry is passed similar to that in case of treatment of goodwill valued on the date of change in profit sharing ratio i.e.
Gaining Partner’s Capital account Dr. (Gain x Accumulated Profits of the firm)
To Sacrificing Partner’s capital Account (Sacrifice x Accumulated Profits of the firm)
(Being the adjustment of Capital accounts for Accumulated profits)
It may be noted that reverse entry is to be passed in case of Accumulated losses.
List of Accounts commonly found in the name of Accumulated profits:
(1) Reserves.
(2) General Reserve.
(3) Profit and loss account (liability side-Cr. balance).
(4) Contingency Reserve.
(5) Workmen’s Compensation Reserve.
(6) Investment Fluctuation Reserve.
It is important to note that Employees Provident Fund is a Liability and should not be distributed in any case.
List of Accounts commonly found in the name of Accumulated losses:
(1) Profit and loss account (asset side-Dr. Balance).
(2) Advertising Suspense Account (Deferred revenue expenditure).
It is to be noted down, that Employees’ Provident Fund is not in the nature of Accumulated profits, but a liability, to be paid by the firm.
Treatment of Workmen’s Compensation Reserve:
If Workmen’s Compensation Reserve appears on the liability side in the Balance sheet, without any liability, it should be distributed among the partners in their old profit sharing ratio.
If, however, there arises a liability on account of compensation to workmen which is less than this reserve, the liability should be shown in the new balance sheet and the balance left in Workmen’s Compensation Reserve should be distributed.
If the liability for workmen compensation is more than the reserve, the difference should be debited to Revaluation account.
If there is an actual liability the account Claim for workmen's compensation account should be used but if it is simply a provision for the same purpose, the account Provision for Workmen Compensation Claim account should be used.
Example:
If Workmen’s Compensation Reserve appears on the liability side of the Balance sheet, at ₹2000, what will be the accounting treatment if:
(1) There is no further information.
Answer: In this case the amount will be credited to the Partners’ Capital accounts in their old profit sharing ratio or adjusting entry will be passed with the full amount adjusted with gain or sacrifice, as the case may be .No reserve to be shown in revised balance sheet.
(2) There is a claim of ₹ 400 on account of workmen’s compensation.
Answer: In this case a claim of ₹ 400 on account of workmen’s compensation should be credited and ₹ 1600 should be distributed or adjusted, as discussed above. In this case the liability is to be shown in the revised Balance sheet at ₹ 400.
(3) There is a claim of ₹ 2500 on account of workmen’s compensation.
Answer: In this case the excess of claim of ₹ 500 on account of workmen’s compensation should be debited to the Revaluation account and the revised balance sheet must show the claim at ₹ 2500.
Treatment of Contingency Reserve:
It will be shared or adjusted in partners' capital accounts , as the case may be.
Treatment of Investment Fluctuation Reserve:
Only the excess of Investment Fluctuation Reserve over the loss on account of Market value being less than the book value is to be shared or adjusted, as the case may be.
Example:
If the Investment Fluctuation Reserve appears at ₹ 3500o, and the Investment appears at ₹ 50000, in the balance sheet, the accounting treatment in different cases would be:
(1) There is no further information.
Answer: In this case, Investment will continue to appear at the same value in the balance sheet and the Investment Fluctuation Reserve will be shared by the old partners in the old profit sharing ratio or adjusted as the case may be.
(2) The market value of investment is ₹ 48000.
Answer: The loss of ₹ 2000 because of decrease in value of Investment will be met out of Investment Fluctuation Reserve , by crediting Investment and the balance ₹ 33000 will be transferred to Partners’ capital accounts in their old profit sharing ratio. The investment to appear at ₹ 48000 in the revised balance sheet.
(3) The market value of investment is ₹ 54000.
Answer: Now ₹ 35000 plus ₹4000 i.e. ₹39000 will be distributed among the partners in their profit sharing ratio. The investment to appear at ₹ 54000 in the revised balance sheet.