Question

Assertion (A): Chetna and Divya are partners sharing profits in 2 : 1. They admit Esha as a new partner, and the new profit-sharing ratio was 3 : 2 : 1. On that date, a debit balance of ₹ 60,000 existed in their Profit & Loss Account. It will be written off between Chetna and Divya in 2 : 1.

Reason (R): Debit Balance in Profit and Loss Account is a fictitious asset, and at the time of reconstitution of the firm, all fictitious assets are written off to the Capital Accounts of old partners in the old profit-sharing ratio.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct, and (R) is the correct reason for (A).

• Both (A) and (R) are correct, but (R) is not the correct reason for (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct, and (R) is the correct reason for (A).

Explanation:

Both Assertion (A) and Reason (R) are factually and accounting sound. Assertion (A) correctly applies the standard accounting treatment: the existing loss (debit balance in P & L account) must be written off in the old ratio (2 : 1) among the old partners (Chetna and Divya) only. Reason (R) provides the exact justification for this action. It correctly classifies the debit balance as a fictitious asset that needs to be eliminated from the books entirely during the reconstitution of the firm, a gain or loss that solely belongs to the pre-existing partners. Therefore, the reason correctly explains the assertion.