question_answer

On admission of a new partner in a firm, an accountant is of the opinion that reserves and accumulated profits should not be distributed as there is no legal requirement and also he is of the opinion that if they are not distributed, they will remain in business and they can be distributed when a partner retires or when the firm is dissolved. Is the accountant correct?

Answer:

No, the accountant is not correct because if the reserves and accumulated profits are distributed at the time of retirement or dissolution, they will have to be distributed among all the partners including the new partner in the profit sharing ratio. It will mean that the new partner will also be given a share out of reserves and accumulated profits. It will not be correct because it puts the new partner to advantage and old partners to disadvantage.