Profit and Loss Account balance appearing on the liabilities side of…

Arjun, Vasisht and Keshav were partners in a business sharing profits equally. Vasisht retires on 31^st March 2022 when the Balance sheet stood as follows:

Balance Sheet as at 31^st March 2022

Liabilities	Amount (₹)	Assets	Amount (₹)
Bills payable	3,000	Land and Building	24,375
Creditors	525	Furniture	6,000
General Reserve	11,250	Inventory	1,050
Profit and loss A/c	4,500	Debtors	9,450
Capital		Bills Receivable	3,750
Arjun 11,250		Cash at Bank	5,625
Vasisht 12,375		Advertisement Suspense	4,650
Keshav 12,000	35,625
	54,900		54,900

Additional information:

1. Arjun and Keshav decided to share future profits in the ratio of 3 : 2
2. Value of Land and Building appreciated by 12%
3. Value of Goodwill of the firm ₹37,500.
4. A provision for doubtful debts is maintained @ 8%
5. Inventory includes an item of ₹450 which has become obsolete

On the basis of the following information answer the question.

Profit and Loss Account balance appearing on the liabilities side of the Balance Sheet will be:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Credited to All partner's capital A/c

A Profit and Loss Account balance on the liabilities side is an accumulated profit. It was earned while all three partners were in the firm, so it belongs to all the partners and is credited to their capital accounts in the old ratio (1 : 1 : 1), the retiring partner Vasisht included.

Option (1) Debited to all partner's capital A/c — Incorrect. Debiting the partners would apply only to accumulated losses (a debit balance on the assets side).
Option (3) Credited to Remaining partner's capital A/c — Incorrect. The retiring partner also has a share in profits earned up to his retirement.
Option (4) Credited to Retiring partner's capital A/c — Incorrect. The continuing partners have their share in it too; only Vasisht’s one-third goes to him.

NCERT (2026-27 edition):
Adjustment of Accumulated Profits and Losses – “Sometimes, the Balance Sheet of a firm may show accumulated profits in the form of general reserve and/on accumulated losses in the form of profit and loss account debit balance. The retiring/deceased partner is entitled to his/her share in the accumulated profits and is also liable to share the accumulated losses, if any. These accumulated profits or losses belong to all the partners and should be transferred to the capital accounts of all partners in their old profit sharing ratio.”