Q.State whether the following statement is True or False, giving reasons: Dissolution of a partnership is different from dissolution of a firm.

On dissolution, a partner's loan is NOT transferred to the Realisation Account — the answer is 'None of these'.

On dissolution of a partnership firm, the normal rule is: all assets (other than cash/bank and fictitious assets) are transferred to the debit of the Realisation Account, and all OUTSIDE/THIRD-PARTY liabilities (creditors, bills payable, bank loan, etc.) are transferred to the credit of the Realisation Account.

A loan given BY a partner to the firm is treated differently, because Section 48 of the Indian Partnership Act, 1932 lays down a specific order of payment of the firm's assets on dissolution:

1. First, pay outside liabilities (creditors etc.)
2. Then, pay off partners' loans (loans advanced by partners to the firm, over and above their capital)
3. Then, pay partners' capital balances

Because a partner's loan has this own, separate priority, it is never routed through the Realisation Account (which deals only with gains/losses on realising assets and discharging outside liabilities). Instead, it is shown and settled through its own Partner's Loan Account, directly against Bank/Cash — it is neither transferred to the Realisation Account, nor to the Partners' Capital Account, nor to the Partners' Current Account.

Both events together result in Dissolution of the partnership firm (Option C).

L, M and N are partners — a minimum of two partners is legally required for a partnership to exist. When M dies on 1st October, 2024, the old partnership (of L, M and N) comes to an end and, if the business is continued by the remaining partners, a new partnership between L and N is technically formed — this part alone would be a reconstitution. However, when N also becomes insolvent soon after, on 1st December, 2024, only L is left as a partner. Since a firm cannot exist with a single partner, the firm as a whole cannot continue its business and must wind up. This chain of events — death of one partner immediately followed by the insolvency of another, leaving only one partner — results in the complete dissolution of the partnership firm, not merely a reconstitution.

A partner's loan to the firm is kept separate from the firm's outside liabilities and from partners' capital — it is repaid directly out of the Realisation proceeds, not routed through the Realisation Account.

Why Charan's loan is treated differently

Section 48 of the Indian Partnership Act, 1932 lays down the order of payment of liabilities on dissolution:

1. Outside/third-party liabilities (creditors, bills payable, bank loan, etc.)
2. Partners' loans to the firm
3. Partners' capital balances

Only the outside liabilities and assets are transferred into the Realisation Account for the purpose of computing profit/loss on dissolution. A partner's loan is a liability of the firm towards one of its own partners, not an outside party — so it is kept in its own separate account and settled directly in cash, without being transferred to Realisation:

Charan's Loan A/c Dr

   To Bank A/c

The debit in Charan's own Loan Account closes it out once payment is made — it never touches the Realisation Account at all.

Dissolution of partnership = business continues (reconstitution); dissolution of firm = business ends.

Thus every dissolution of a firm involves dissolution of the partnership, but every dissolution of a partnership does not lead to dissolution of the firm.

The statement is True.

Dissolution of partnership (change among partners, firm continues) is different from dissolution of firm (business closes down completely). When the firm itself is dissolved, the partnership among all partners necessarily comes to an end. Therefore dissolution of a firm necessarily involves dissolution of partnership - the statement is true.

All partners are jointly and severally, and unlimitedly, liable for the firm's debts.

Under the Indian Partnership Act, 1932, a partnership firm is not a separate legal entity like a company — it is simply an association of partners carrying on business together, so in law, the partners themselves are the ones who owe money when the firm owes money. This produces two important features of a partner's liability:

• Joint and several liability: creditors of the firm can sue all the partners together, or any one partner individually, to recover the full amount due — a partner who is made to pay can later claim contribution from the other partners for their share.
• Unlimited liability: if the firm's own assets are not enough to pay off its debts, the partners' private/personal assets can be used to meet the shortfall — this is a key feature that distinguishes a partnership from a company (where shareholders enjoy limited liability).

This unlimited, joint-and-several liability is exactly why — on dissolution of a firm — the Realisation Account and partners' capital accounts are settled carefully: any deficiency in a partner's capital account, or any firm liability that cannot be paid out of firm assets, ultimately falls on the partners personally.

Varun's wife's loan will be paid first because it is an external liability, while Arun's loan is a partner's loan, which is paid after external liabilities during dissolution.