At the time of death of a partner, undistributed Losses appearing in the balance sheet of the old firm is transferred to the capital account of:
At the time of death of a partner, undistributed Losses appearing in the balance sheet of the old firm is transferred to the capital account of:
Solution
When a partner dies, any undistributed losses (or profits) appearing in the balance sheet must be distributed among all old partners including the deceased partner in their old profit sharing ratio.
This is because these losses were accumulated during the period when all the old partners were active in the firm. Since they incurred during the old partnership, they must be shared in the old profit sharing ratio.
Journal Entry:
All Partners' Capital A/cs ... Dr.
To Profit & Loss A/c (or Reserve)
The ratio used for debiting partners' capital accounts will be the old profit sharing ratio.
For example, if partners A, B, and C share profits in the ratio 3:2:1, and C dies with undistributed losses of ₹60,000 in the balance sheet, the loss will be distributed as:
- A's share = ₹60,000 × 3/6 = ₹30,000
- B's share = ₹60,000 × 2/6 = ₹20,000
- C's share (deceased) = ₹60,000 × 1/6 = ₹10,000
The deceased partner's capital account will be debited with their share, and this reduced capital balance will be paid to their legal heirs.
Correct Answer: Option 2
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