At the time of admission of a new partner, the credit balance of ₹24,000 in the Profit and Loss Account was distributed in the new profit-sharing ratio. What should be the correct basis for its distribution?

Correct answer: Old profit-sharing ratio

The credit balance of the Profit and Loss Account represents accumulated profit earned before the new partner’s admission. It belongs only to the old partners and must therefore be distributed in their old profit-sharing ratio, not in the new ratio or sacrificing ratio. Exam tip: Profits, losses and reserves relating to the period before admission are shared by the old partners in the old ratio.