Question

Why are 'Reserves and Surplus' distributed at the time of reconstitution of the firm?

Hint:

At the time of reconstitution, always ensure reserves and surplus are distributed according to the new profit-sharing ratio, unless otherwise agreed.

Answer 1

Step 1: Understanding Reserves and Surplus.
Reserves and Surplus represent the accumulated profits that have been retained in the firm for future use. These reserves are often divided among the partners when there is a change in the partnership structure, such as during reconstitution.
Step 2: Reason for Distribution:
When a firm undergoes reconstitution, such as when a new partner is admitted or an existing partner retires, the reserves and surplus must be distributed among the partners. This is done to ensure that the accumulated profits are fairly allocated according to the new profit-sharing ratio. This prevents the reserves from remaining with the old partners, who no longer share in the profits after the reconstitution.
Step 3: Conclusion.
The distribution of reserves and surplus ensures that all partners receive their fair share of the firm’s accumulated wealth, in line with the new partnership structure.