Q.A and B are partners in a firm sharing profits in the ratio of 3:2. Mrs A has given a loan of ₹ 20,000 to the firm and the firm also obtained a loan of ₹10,000 from 'B'. The firm was dissolved and its assets were realised for ₹ 25,000. State the order of payment of Mrs A's loan and B's loan with reason, if there were no creditors of the 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 …

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 …

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 …

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

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. There …

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). …

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.