A, B and C are partners sharing profits in the ratio 5:3:4. At the time of reconstitution, the General Reserve is ₹60,000 and the Profit and Loss Account has a debit balance of ₹1,08,000. What will be the net effect of these two items on C’s Capital Account?

Correct answer: ₹16,000 debit

C’s share of the General Reserve is ₹60,000 × 4/12 = ₹20,000 credit. C’s share of the debit balance of the Profit and Loss Account is ₹1,08,000 × 4/12 = ₹36,000 debit. Therefore, the net effect is ₹36,000 debit − ₹20,000 credit = ₹16,000 debit. ₹20,000 credit represents only the reserve adjustment, while ₹36,000 debit represents only the accumulated loss adjustment. Exam tip: Credit old partners with reserves and debit them with accumulated losses in the old profit-sharing ratio.