When a partner retires in the middle of the year and his share of profit is calculated based on previous years' profit. Which of the following account is to be debited?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Profit and loss suspense account is debited.
When a partner retires in the middle of the year and his share of profit is calculated based on previous years' profit, Profit and loss suspense account is debited for recording it.
To account for the deceased partner's share of profits and loss during the interim period in the company's financial records, the following journal entry is recorded:
FOR PROFIT-
Debit Profit and Loss Suspense Account and Credit Deceased Partner's Capital Account.
Subsequently, the Profit and Loss Suspense Account is reconciled by transferring its balance to the Gaining Partners' Capital Accounts based on their gaining ratio.
FOR LOSS-
Debit Deceased Partner's Capital Account and credit Profit and Loss Suspense Account.