In case of admission of a partner, any accumulated losses appearing in the form of a debit balance of profit and loss account and/or deferred revenue expenditure appearing in the balance sheet of the firm, should be transferred to _____.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Debit Side of Old Partners’ Capital Account
A debit balance of the Profit and Loss Account and deferred revenue expenditure are losses the firm has not yet written off. They were earned before the new partner arrived, so they belong to the partners who were there at the time, and they are shared in the old ratio.
A loss reduces what a partner is owed, so it is written off to the debit side of those capital accounts:
Old Partners’ Capital A/c Dr. (in the old ratio)
To Profit and Loss A/c
To Deferred Revenue Expenditure A/c
Why the other options are incorrect
Option (2) Debit Side of All Partners’ Capital Account — Incorrect. This makes the incoming partner bear a loss from a period in which he had no share. Accumulated losses are written off among the old partners before he comes in.
Option (3) Credit Side of Old Partner Capital Account — Incorrect. A credit increases what a partner is owed. These are losses, so they reduce it, and a reduction is recorded on the debit side.
Option (4) Credit Side of All Partners’ Capital Account — Incorrect. This is wrong twice over: it treats a loss as though it were a gain, and it shares it with a partner who was not there when it arose.