Answer :
Answer:
When a partnership is reconstituted, the provision for doubtful debts is not distributed among partners in the old profit-sharing ratio (PSR) because the provision is essentially an accounting adjustment for anticipated future losses rather than an actual profit or loss. Here are the key reasons for this approach:
1. Nature of Provision for Doubtful Debts:
- The provision for doubtful debts represents an estimate of the debts that may not be collectible in the future. It is a precautionary measure rather than an actual expense that has already occurred.
- Since it is an anticipated loss, it does not affect the cash flow or the actual profits directly at the time of reconstitution.
2. Accurate Reflection of Financial Position:
- At the time of reconstitution, the financial statements should accurately reflect the assets and liabilities of the partnership. This includes making sure that receivables are presented at their net realizable value.
- By adjusting the provision for doubtful debts, the partnership ensures that the balance sheet shows a realistic picture of its financial health.
3. Equity Among Incoming/Outgoing Partners:
- When reconstitution involves admission, retirement, or change in the profit-sharing ratio of partners, it's important to ensure fairness.
- Adjusting the provision for doubtful debts ensures that the incoming or outgoing partner is not unfairly advantaged or disadvantaged by the quality of the receivables.
4. Not a Distributable Profit or Loss:
- The provision for doubtful debts is not considered a distributable item like profits or losses. It is an internal adjustment that affects the valuation of assets, rather than an item that needs to be distributed among partners.
5. Accounting Consistency:
- Maintaining consistency in accounting practices is crucial. Provisions for doubtful debts are typically adjusted against the receivables directly in the balance sheet rather than being distributed through the profit and loss account.