Q.Why are accumulated profits, reserves and losses distributed among all the partners, including the outgoing partner, in the OLD profit-sharing ratio (and not the new ratio) at the time of retirement or death of a partner?

Reserves and accumulated losses were built up in years that have already passed, under a ratio that has not yet changed.

General Reserve and any credit balance of the Profit and Loss Account represent profits earned in earlier years, when the outgoing partner was still a full member of the firm and the old ratio applied; a debit balance of Profit and Loss Account represents losses of those same years. Since the new ratio only takes effect from the date of reconstitution onward, it would be unfair to let it apply retroactively to profits or losses of years it never governed — so these items are always shared i …

General Reserve and any credit balance of the Profit and Loss Account represent profits that the firm has already earned and simply chosen not to distribute in earlier years. Those earlier years belong entirely to the period when the old profit-sharing ratio was in effect, and the outgoing partner was, at that time, a full and equal member of the firm entitled to his or her old share of every rupee of profit earned. The same logic applies in reverse to a debit balance of the Profit and Loss Account or unwritten-off deferred revenue expenditure — these represent past losses that the old ratio's partners, including the one now leaving, are jointly responsible for.

The new ratio, by contrast, is agreed only from the date of reconstitution onward — it has no bearing on, and no claim over, profits or losses of years that came before it. If accumulated profits or losses were distributed in the new ratio instead:

• The outgoing partner would unfairly lose his or her rightful share of reserves built up while he or she was still contributing to the firm, or
• A continuing partner's share of an old loss would change simply because the ratio changed today, even though that loss has nothing to do with today's reconstitution. …

Students sometimes confuse this rule with the NEW ratio being used for future profit-sharing and mistakenly apply the new ratio here too. Remember: anything relating to a period BEFORE reconstitution (reserves, accumulated profit/loss, revalu …