On dissolution, the balance of accumulated profits is transferred to which account?

Correct answer: Capital Accounts

Accumulated profits such as general reserve, undistributed profit or credit balance of the profit and loss account represent profits earned for the partners before dissolution. They are not an asset to be realised and are not a liability payable to outsiders. Therefore, at dissolution, the balance is distributed among the partners in their profit-sharing ratio and transferred to their capital accounts, or to current accounts when the fixed-capital method is being used. The Realisation Account records the disposal of assets and settlement of liabilities, so option B is not appropriate. Cash records receipts and payments, while the Creditors’ Account records external claims. Hence option A, Capital Accounts, is correct. The essential concept is that accumulated profits belong to the partners and increase their claims on the firm.