When accumulated profits are distributed among the old partners at the time of a new partner’s admission, what is the effect on their capital?

Correct answer: Capital increases

Accumulated profits or reserves belong to the old partners. Before the new partner is admitted, they are distributed among the old partners in their old profit-sharing ratio, and their capital accounts are credited. Therefore, their capital increases. ‘No effect’ is incorrect because the reserve is adjusted through the partners’ capital accounts. Exam tip: Existing reserves are distributed only among the old partners in their old ratio.