Question : What happens to accumulated earnings and losses when a partner retires?
Option 1: Debited to all partner’s capital accounts in old ratio.
Option 2: Credited to all partner’s capital accounts in old ratio.
Option 3: Credited to remaining partner’s capital accounts in new ratio.
Option 4: Credited to remaining partner’s capital accounts in gaining ratio.
Correct Answer: Credited to all partner’s capital accounts in old ratio.
Solution :
At the time of retirement of a partner, if there exist any reserve or accumulated profit in the books of the firm, they should be transferred to the old partner's capital/current accounts in the old profit sharing ratio, because these items belongs to the old partners.
In the same manner, old partner's capital/current accounts should be debited in the old ratio if any accumulated loss appears in the asset side of the balance sheet.
Hence the correct answer is option 2.
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