Question

At the time of admission of a new partner, the balance in the Profit and Loss Account (Credit Balance) appearing in the books is transferred to:

• A. Revaluation Account
• B. Capital Accounts of all partners in old profit-sharing ratio
• C. Capital Accounts of old partners in old profit-sharing ratio
• D. Capital Accounts of all partners in new profit-sharing ratio

Hint:

Rule to remember: Accumulated Profits, General Reserve and Credit Balance of Profit & Loss Account always belong to old partners and are distributed in the old profit-sharing ratio before admission of a new partner.

Answer 1

The Correct Option is C

Concept: At the time of admission of a new partner, all accumulated profits and reserves belonging to the old partners must be distributed among them before the new partner is admitted. A credit balance in the Profit and Loss Account represents accumulated profits that have not yet been distributed. Since these profits were earned before the admission of the new partner, the new partner has no claim over them. Therefore, such profits are transferred only to the old partners in their old profit-sharing ratio.

Step 1: Understand the nature of Profit and Loss Account credit balance.
A credit balance in the Profit and Loss Account indicates:
• Accumulated profits.
• Undistributed earnings.
• Profits belonging to existing partners. Thus it is a gain available for distribution among partners.

Step 2: Identify the stage of admission.
The question relates to the admission of a new partner. Whenever a new partner enters:
• Existing profits belong to old partners.
• Existing reserves belong to old partners.
• New partner gets no share in past profits. Therefore accumulated profits must first be distributed.

Step 3: Apply the accounting treatment.
The journal entry is: \[ \text{Profit and Loss A/c Dr.} \] \[ \text{To Old Partners' Capital A/cs} \] in the old profit-sharing ratio. This transfers accumulated profits to the capital accounts of old partners.

Step 4: Examine the options.
Option (A): Revaluation Account is used for revaluation of assets and liabilities, not for accumulated profits. Hence incorrect. Option (B): Includes all partners, including the new partner. Incorrect because the new partner is not entitled to past profits. Option (C): Capital Accounts of old partners in old ratio. This is the correct accounting treatment. Option (D): New ratio is used after admission. Accumulated profits must be distributed before admission. Hence incorrect.

Step 5: Conclude the answer.
Therefore accumulated profits represented by the credit balance of Profit and Loss Account are transferred to: \[ \boxed{\text{Capital Accounts of old partners in old profit-sharing ratio}} \] Hence Option (C) is correct.