Guru and Prakash were partners in a firm sharing profits and losses in the ratio of 7 : 3. They admitted Anu as a new partner for 1/4th share in the profits of the firm. On the date of Anu's admission, the Profit and Loss Account of Guru and Prakash showed a credit balance of ₹ 40,000. The necessary journal entry for its treatment will be:
Show Hint
At the time of admission of a new partner:
Credit balance in P\& L A/c (Accumulated Profits) \(\Rightarrow\) Transfer to Old Partners' Capital A/cs in Old Ratio
Debit balance in P\& L A/c (Accumulated Losses) \(\Rightarrow\) Transfer from Old Partners' Capital A/cs in Old Ratio
New partner is not entitled to past profits or losses!
We need to identify the correct journal entry for treatment of the credit balance in Profit and Loss Account at the time of admission of a new partner. Step 1: Understand the nature of the Profit and Loss Account balance.
A credit balance in the Profit and Loss Account represents accumulated profits (undistributed profits) of the firm. At the time of admission of a new partner, these accumulated profits belong to the old partners (Guru and Prakash) and should be transferred to their capital accounts in their old profit sharing ratio. Step 2: Key rules for treatment of accumulated profits.
Accumulated profits (credit balance in P\& L A/c) are distributed among the old partners in their old profit sharing ratio.
The new partner is not entitled to any share in accumulated profits/losses existing before his admission.
The journal entry is:
\[
\begin{array}{ll}
\text{Profit and Loss A/c (Credit balance)} & \text{Dr.} \\
\quad \text{To Old Partners' Capital A/cs (in old ratio)}
\end{array}
\]
Step 4: Journal entry.
\[
\begin{array}{ll}
\text{Profit and Loss A/c} & \text{Dr. 40,000} \\
\quad \text{To Guru's Capital A/c} & 28,000 \\
\quad \text{To Prakash's Capital A/c} & 12,000
\end{array}
\]
Step 5: Analyze each option.
(A): Shows distribution as 21,000 and 9,000 (which would be in ratio 7:3 of 30,000, but total is 30,000 not 40,000). Also wrongly gives ₹ 9,000 to Anu (new partner) which is incorrect.
(B): Shows Profit and Loss A/c Dr. 40,000; To Guru's Capital A/c 28,000; To Prakash's Capital A/c 12,000 ✓ Correct.
(C): Shows debit to partners' capital accounts and credit to P\& L A/c, which is the entry for accumulated losses, not profits.
(D): Shows debit to partners' capital accounts (28,000 and 12,000) and credit to P\& L A/c, which is also for losses.
Final Answer: (B) Profit and Loss A/c Dr. 40,000; To Guru's Capital A/c 28,000; To Prakash's Capital A/c 12,000
