Assertion (A): Chetna and Divya are partners sharing profits in 2 : 1. They admit Esha as a new partner, and the new profit-sharing ratio was 3 : 2 : 1. On that date, a debit balance of ₹ 60,000 existed in their Profit & Loss Account. It will be written off between Chetna and Divya in 2 : 1. Reason (R): Debit Balance in Profit and Loss Account is a fictitious asset, and at the time of reconstitution of the firm, all fictitious assets are written off to the Capital Accounts of old partners in the old profit-sharing ratio. In the context of the above two statements, which of the following is correct?

Question

KollegeApply · Accepted Answer

Both (A) and (R) are correct, and (R) is the correct reason for (A). Explanation: Both Assertion (A) and Reason (R) are factually and accounting sound. Assertion (A) correctly applies the standard accounting treatment: the existing loss (debit balance in P & L account) must be written off in the old ratio (2 : 1) among the old partners (Chetna and Divya) only. Reason (R) provides the exact justification for this action. It correctly classifies the debit balance as a fictitious asset that needs to be eliminated from the books entirely during the reconstitution of the firm, a gain or loss that solely belongs to the pre-existing partners. Therefore, the reason correctly explains the assertion.

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