If profit was overstated and the correction decreases profit, what happens in the partners’ accounts?

Correct answer: Debit in the profit-sharing ratio

The governing concept is reversal of an excess profit previously credited to partners. If profit was overstated, the partners may have received more profit than they were entitled to under the correct calculation. When the correction reduces total profit, the excess already attributed to them must be withdrawn from their accounts in the agreed profit-sharing ratio. Hence the partners’ capital or current accounts are debited. A credit would increase the overstatement, and the bank account is not necessarily involved because this is an accounting allocation correction rather than a cash transaction. “No effect” is also incorrect because the partners’ balances must be corrected. Option A is therefore correct.