How is the debit balance of the Profit and Loss Account distributed on dissolution?

Correct answer: Debited to partners’ Capital Accounts

The governing concept is that a debit balance in the Profit and Loss Account represents an accumulated loss. On dissolution, this loss is transferred to the partners’ Capital Accounts in their agreed profit-sharing ratio. Each partner’s Capital Account is debited because the loss reduces the amount ultimately payable to that partner. Option A reverses the treatment and would be appropriate for distributing a profit, not a debit balance. Creditors’ Accounts are not used to distribute partners’ accumulated loss, and the Cash Account records cash movements rather than allocating the loss. Therefore, the debit balance is debited to the partners’ Capital Accounts, making option B correct.