Read the following two statements Assertion (A) and Reason (R). Choose one of the correct alternatives given below.
Assertion (A): Undistributed profits or losses appearing in the balance sheet at the time of admission should be transferred to all partner’s capital/current account.
Reason (R): Undistributed profits or losses appearing in the balance sheet at the time of admission belong to the old partners as they are earned by them.
Answer & explanation
Correct answer: option 4
The correct answer is option 4- Assertion (A) is False but Reason (R) is true.
Assertion (A): Undistributed profits or losses appearing in the balance sheet at the time of admission should be transferred to all partner’s capital/current account. This is False. At the time of admission of new partner undistributed profit or losses are distributed among the old partners' capital account (not All) in the existing profit-sharing ratio.
Reason (R): Undistributed profits or losses appearing in the balance sheet at the time of admission belong to the old partners as they are earned by them. This is correct because undistributed profits or losses are the result of business operations conducted before the admission of the new partner. Since they are earned during the period when only the old partners were part of the partnership, these profits or losses belong to them. This is the reason for which any profit or loss that arises out of revaluation account is credited or debited to the old partners' capital account in their old profit-sharing ratio.