Question

Assertion (A): Disha, Era and Fija sharing profits in 2 : 2 : 1 decided to change their profit sharing ratio to 1 : 2 : 3. Profit and Loss (Dr.) balance is appearing in their books at ₹ 1,50,000. It will be carried forward and will be set off against future profits.

Reason (R): Debit balance of Profit and Loss Account came into existence before the change in profit sharing ratio and hence will be debited to partners in old profit sharing ratio.

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

Options

• Both (A) and (R) are true, but (R) is not the correct explanation of (A).

• Both (A) and (R) are true and (R) is the correct explanation of (A).

• Both (A) and (R) are false.

• (A) is false, but (R) is true.

Answer 1

(A) is false, but (R) is true.

Explanation:

• The debit balance of the Profit & Loss Account should not be carried forward. It must be transferred to the partners' capital accounts in the old profit-sharing ratio before the change.
• Since the loss arose before the change in the profit-sharing ratio, it belongs to the old partners and is debited to their capital accounts in the old ratio (2 : 2 : 1).