Why is it wrong to distribute accumulated profits in the new ratio?

Correct answer: Because they are old profits earned before admission

The governing principle is that profit belongs to the partners who earned it during the relevant period. Accumulated profits and reserves arise from earnings made before the admission of the new partner. The incoming partner was not a member of the firm during that period and did not contribute to generating those profits. Consequently, the amount must be transferred or distributed among the old partners in their old ratio, not in the new ratio. Option A correctly states the reason. Option B is false because accumulated profits are not always losses, option C confuses partners’ funds with external liabilities, and option D is incorrect because an accumulated profit is an accounting balance and need not be held as separate cash in the bank.