Question

A, B, and C are partners sharing profits in the ratio of 3:2:1. C died on 1st July, 2023. On this date, final accounts were prepared to ascertain profits for the period. It resulted in a profit of ₹1,75,000 to the firm. To give effect to the above

• A. Profit and Loss Account will be debited
• B. Profit and Loss Appropriation Account will be debited
• C. Profit and Loss Account will be credited
• D. Profit and Loss Appropriation Account will be credited

Answer 1

The Correct Option is D

Profit Distribution Upon Partner's Death 

When a partner in a firm dies, it is necessary to determine and distribute the profit earned by the firm from the beginning of the accounting period up to the date of the partner's death. This profit is distributed among the partners, including the deceased partner's legal representatives, according to the old profit-sharing ratio.

Credit to Profit and Loss Appropriation Account

To account for this distribution, the Profit and Loss Appropriation Account is credited. This account reflects the profits due to each partner based on their respective profit-sharing ratio.

Distribution of Profit

Given the profit-sharing ratio of A, B, and C as 3 : 2 : 1, and a profit of ₹ 1,75,000, the profit will be divided as follows:

• A's Share: \( \frac{3}{6} \times ₹ 1,75,000 = ₹ 87,500 \)
• B's Share: \( \frac{2}{6} \times ₹ 1,75,000 = ₹ 58,333.33\) (Rounded to ₹ 58,333)
• C's Share: \( \frac{1}{6} \times ₹ 1,75,000 = ₹ 29,166.67 \) (Rounded to ₹ 29,167)

Accounting Entry

The journal entry for distribution of profit up to the date of death is:

        

Profit and Loss Suspense A/c Dr.   ₹ 1,75,000
To A's Capital Account     Cr.   ₹ 87,500
To B's Capital Account     Cr.   ₹ 58,333
To C's Capital Account     Cr.   ₹ 29,167
        

   

Notes

The profits or losses are transferred to the capital accounts of the partners.

Ensure the profit is shared between the partners.

Profit and Loss suspense account is debited because, till death ,books are not closed

Answer 2

Transfer of Profit to Profit and Loss Appropriation Account 

The profit of ₹1,75,000 is transferred to the Profit and Loss Appropriation Account:

• Reason: As the appropriation account is responsible for distributing profits among partners.

Note: The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account and reflects the distribution of profits.