In case of retirement, the profit and loss suspense account is closed by transferring the amount to the _________.
In case of retirement, the profit and loss suspense account is closed by transferring the amount to the _________.
Solution
✅ Correct Option: 4
The correct option is:
Gaining partners Capital Account
Accounting Mechanism:
When a partner retires mid-year, their share of profit or loss from the date of the last balance sheet up to the date of retirement is estimated and temporarily debited or credited to a Profit and Loss Suspense Account.
However, at the end of the accounting year, this suspense account must be closed.
- If the profit-sharing ratio among the remaining partners does not change: The balance in the P&L Suspense Account is simply carried over to the final Balance Sheet asset/liability side until final accounts are prepared.
- If the profit-sharing ratio among the remaining partners changes: The remaining partners have gained specific shares from the retiring partner. To close the P&L Suspense Account, its balance is transferred directly to the Gaining partners' Capital Accounts in their gaining ratio.
Since "Gaining partners Capital Account" is specifically provided as an option alongside "Balance Sheet," it refers to the scenario where the adjustment is closed out through the remaining partners' capital adjustments due to a change in the economic structure.