Book-Keeping and Accountancy · Ch 6 — Dissolution of Partnership Firm
Settlement of Accounts on Dissolution — Section 48
Settlement of Accounts on Dissolution — Section 48
Once a firm is dissolved, its assets must be turned into cash and that cash must be applied in a strict, legally-fixed order to settle everyone the firm owes money to. This order is laid down in Section 48 of the Indian Partnership Act, 1932, and is one of the most frequently tested provisions in this chapter.
Treatment of losses — Section 48(a). Losses, including any deficiency of capital, are to be paid: first out of profits, next out of capital, and lastly, if still necessary, by the partners individually in the proportion in which they were entitled to share profits.
Order of applying assets — Section 48(b). The assets of the firm (including any amount partners contribute to make up a capital deficiency) must be applied, in the following strict order, subject to any contrary agreement among the partners:
| Order | Application of the firm's assets |
|---|---|
| 1st | In paying the debts of the firm to third (outside) parties — e.g. creditors, bank loans |
| 2nd | In paying each partner rateably what is due for advances/loans given to the firm, as distinguished from capital |
| 3rd | In paying each partner rateably what is due on account of capital |
| 4th | The residue, if any, is divided among the partners in their profit-sharing ratio |
Money a partner has lent to the firm, distinct from their capital contribution. Under Section 48(b), it ranks ahead of capital and must be repaid before any partner …
Whatever surplus remains after third-party debts, partners' loans and partners' capital have all been fully paid off; it is shared among the partners in their profit-shar …