On dissolution, how is the credit balance of the Profit and Loss Account distributed among partners’ capital accounts?

Correct answer: Credited in the profit-sharing ratio

The governing concept is the treatment of accumulated profits at the time of dissolution. A credit balance in the Profit and Loss Account represents undistributed or accumulated profit belonging to the partners. It is transferred to the partners’ capital accounts on the credit side in their agreed profit-sharing ratio, because that ratio determines their entitlement to partnership profits. Therefore option A is correct. It is not debited, since the balance is a benefit rather than a loss. The capital ratio is relevant only when a separate agreement or rule specifically requires it, and “cash ratio” is not the normal basis for distributing accumulated profit. Equal distribution is also incorrect unless the partners share profits equally.