Why Profit and loss account shown in assets side of balance sheet is loss for old partners

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Answer

Explanation of Profit and Loss Account shown in Assets side of Balance Sheet as loss for old partners

Meaning of Profit and Loss Account: The Profit and Loss Account is a financial statement that shows the net profit or loss made by the business over a specific period of time.

Old Partners: Old partners refer to the partners who have left the business before the date of the balance sheet.

Assets side of Balance Sheet: The assets side of the balance sheet shows the assets of the business and is equal to the liabilities and owners' equity side.

Why Profit and Loss Account shown in Assets side of Balance Sheet: The Profit and Loss Account is shown in the assets side of the balance sheet when the business has incurred a loss during the accounting period. The loss is deducted from the owners' equity side and shown as a negative amount on the assets side to balance the equation.

Loss for Old Partners: When old partners leave the business, they are entitled to their share of the profits or losses up until the date they left. Therefore, if the business has incurred a loss during the accounting period, the old partners are also liable for their share of the loss. This is why the loss is shown on the assets side of the balance sheet as a negative amount for old partners.

Effect on Balance Sheet: The loss shown on the assets side of the balance sheet reduces the owners' equity and the total assets of the business. This means that the liabilities side of the balance sheet must also be adjusted to balance the equation.

In conclusion, the Profit and Loss Account is shown in the assets side of the balance sheet as a negative amount for old partners who have left the business because they are liable for their share of the losses incurred during the accounting period. This reduces the owners' equity and the total assets of the business, requiring adjustments to the liabilities side of the balance sheet to balance the equation.

Answer

The dr. balance of P&L A/c is technically not an asset to the company. It used to be shown in the balance sheet in the assets’ side just as a balancing figure, so that the balance sheet would tally.

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