Question

Kamal and Vimal were partners in firm sharing profits in the ratio of 3:2. Ghosh was admitted as a new partner for  `1/5` th share in the profits. On Ghosh's admission, the balance sheet of the firm showed a credit balance of  Rs 10,000 in its Profit and Loss Account which was debited by the accountant of the firm in the accounts of Kamal and Vimal. Did the accountant give correct treatment to the balance of Profit and Loss Account? If 'yes' give the reason and if 'not' give the correct treatment.

Answer 1

The balance of accumulated profits and losses is transferred among the old partners in the old ratio. The capital accounts of the old partners are to be debited/credited depending whether the fund balance available is a credit balance or a debit balance. Here, Profit and Loss Account had a credit balance of Rs 10,000. Thus, the capital accounts of the old partners (Kamal and Vimal) should have been credited in the ratio of 3:2 i.e. the old ratio. Thus, the accountant has wrongly debited the capital accounts of the old partners.