What is the basic accounting principle for distributing reserves?

Correct answer: Earned in old period so old partners are entitled

The governing principle is that a reserve is created from profits earned in an earlier accounting period. At the time of admission, those earlier profits belong to the partners who were entitled to them when they were earned. Therefore, the reserve is transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Option A correctly states this principle. The existence of cash does not give the incoming partner a right to past profits, and showing a reserve on the liabilities side does not make it an outside liability. The new ratio applies to future profits after admission, not to past accumulated reserves.