Dissolution of Partnership Firms including Piecemeal Distribution: formula sheet

Key formulas

Dissolution of the firm (Section 39)

Dissolution of the firm = dissolution of partnership between ALL the partners

If the business continues with some partners, it is a change in the partnership, not dissolution of the firm.

Notice for partnership at will (Section 43)

Written notice by any partner to all other partners; dissolved from the date in the notice, or from the date of communication if no date is stated

Applies only where the partnership is at will. The notice must be in writing.

Court dissolution (Section 44)

Grounds (a) to (g), at the suit of a partner

(a) unsound mind; (b) permanent incapacity; (c) prejudicial conduct; (d) wilful or persistent breach, or conduct making it not reasonably practicable to carry on; (e) transfer or charge or sale of whole interest; (f) business cannot be carried on save at a loss; (g) just and equitable.

Who is the 'other' partner in Section 44

Grounds (b) to (e): the defaulting partner must be 'a partner, other than the partner suing'

A partner cannot sue on the basis of his own incapacity, conduct, breach or transfer. Ground (a) can be brought by the next friend of the partner of unsound mind or by any other partner.

Settlement after dissolution (Section 48)

Losses: first profits, next capital, lastly partners individually in profit-sharing ratio. Assets: (i) debts to third parties, (ii) partners' advances, (iii) partners' capital, (iv) residue in profit-sharing ratio

Subject to agreement by the partners.

Order of application of assets (Section 48(b))

1. Outside liabilities → 2. Partners' loans/advances (rateably) → 3. Partners' capital (rateably) → 4. Residue in profit-sharing ratio

Applies subject to agreement between partners. Cash contributed by partners to cover capital deficiencies counts as firm assets.

Order of meeting losses (Section 48(a))

Profits → Capital → Partners individually in profit-sharing ratio

Losses include deficiency of capital. The final step is a personal contribution by partners.

Cash available for partners

Cash realised from assets + Opening cash/bank − Realisation expenses − Outside liabilities paid

Use this figure to check how far loan and capital can be repaid.

Final capital of a partner

Capital + Share of reserves/profits − Share of realisation loss − Drawings − Other debits (+ Loan shown separately)

Keep the partner's loan separate from the capital account. Settle the loan first.

Rateable payment

Amount paid to each = Cash available × (Amount due to that partner ÷ Total amount due to all partners at that level)

Used when cash is not enough to pay loans in full, or capital in full.

Transfer of assets

Realisation A/c Dr (book value) To Asset A/c

Exclude cash, bank, fictitious assets and the partners' own accounts. Fictitious assets such as deferred expenses or the P&L debit balance go to partners' capital accounts instead.

Transfer of liabilities

Liability A/c Dr To Realisation A/c

Outside liabilities only. Do not transfer partners' capital, reserves or accumulated profits.

Asset sold

Bank A/c Dr To Realisation A/c (amount received)

Gain or loss arises because the amount received differs from the book value.

Asset taken by a partner

Partner's Capital A/c Dr To Realisation A/c (agreed value)

No cash moves. Use the agreed value, not the book value.

Liability paid

Realisation A/c Dr To Bank A/c (amount actually paid)

A discount on settlement shows up as a gain automatically.

Realisation expenses

Realisation A/c Dr To Bank A/c

If a partner bears them and gets a fixed sum, debit Realisation A/c and credit that partner's capital account with the fixed sum only.

Profit or loss on realisation

Total of credit side – total of debit side

If credits are more, it is a profit. Share it in the profit-sharing ratio. Debit Realisation A/c and credit capital accounts for profit. Do the reverse for loss.

Final payment to a partner

Capital balance after all adjustments = cash paid

Total of final payments must equal the closing bank balance. This is your check.

Step 1: Share of realisation loss

Loss share of each partner = Total realisation loss × his profit-sharing ratio

All partners, including the insolvent one, share the loss in the profit ratio first.

Deficiency of the insolvent partner

Deficiency = Debit balance of his capital account after his share of loss − Amount received from his estate

If the estate pays nothing, the whole debit balance is the deficiency.

Garner v Murray sharing

Share of solvent partner X = Deficiency × (Capital of X ÷ Total capital of solvent partners)

Use capitals before dissolution, before realisation loss, after adjusting reserves, profits and drawings.

Default rule (section 48(a))

Losses, including deficiency of capital: first out of profits, next out of capital, lastly by partners individually in profit ratio

Applies subject to agreement by the partners.

Order of payment (section 48(b))

Third-party debts → partners' advances (loans) → partners' capital → residue in profit ratio

Use this order to check the final cash paid to partners.

Cash check

Cash realised + cash from estate − outside liabilities − realisation expenses = Total paid to solvent partners

This must equal the sum of closing balances of the solvent partners' capital accounts.

Relative capital

Relative capital = Partner's capital (after loss on assets realised) ÷ His share in profit ratio

Use the ratio parts, for example 3 for A in 3:2:1. The highest figure is paid first.

Amount to reach next level

Amount = (Higher relative capital − Next relative capital) × Sum of ratio parts of the partners at the higher level

For the top partner alone, use only his ratio part. When two partners are at the top, use the sum of their parts.

Split among partners at the same level

Each partner's share = Amount for that level × His ratio part ÷ Sum of ratio parts of partners at that level

Partners paid together share in their profit ratio among themselves.

Loss on realisation

Loss on instalment = Book value of assets realised − Cash realised

Share it in profit ratio and deduct it from capitals before ranking.

Order of cash application

Expenses → Outside liabilities → Partners' loans → Partners' capital

Only the balance after the first three items is distributed under this method.

Order of payment of cash

Realisation expenses and outside liabilities → partners' loans → partners' capital

Distribute to partners only what is left after the earlier items are fully paid or provided for.

Maximum loss

Maximum loss = book value of assets not yet realised (+ expenses still expected)

Assume these assets will fetch nothing. Use book values, not estimated values.

Balance of each partner at an instalment

Payable = Capital − Share of actual losses on realisation so far − Cash already paid − Share of maximum loss

Share of losses is in profit-sharing ratio. Add any profit on realisation and any partner's loan only if the question treats it with capital.

Treating a deficiency

Deficiency of partner = negative balance; borne by other partners in the ratio of their capitals

The deficiency is shared in the ratio of capitals, as under the Garner v Murray rule, using the capitals given in the question. Recalculate balances after deducting the deficiency.

Cross-check

Total paid to partners = Cash available for partners at that instalment

If the totals do not match, an error has crept into the working.

Quick revision

• Dissolution of the firm means dissolution of partnership between all partners (Section 39).
• In a partnership at will, any partner may dissolve the firm by written notice to all the others (Section 43).
• Under Section 48, the partners' agreement overrides the default rules for settling accounts.
• Losses, including capital deficiency, are met first from profits, then from capital, and lastly by the partners individually in profit-sharing ratio.
• Order of payment of assets: outside debts, then partners' loans (advances), then partners' capital, then residue in profit ratio.
• A partner's loan to the firm is paid before capital and rateably among the lending partners. It is not capital.
• The realisation account shows the profit or loss on realisation, which is shared in profit ratio and transferred to partners' capital accounts.
• Cash and bank balances are not transferred to the realisation account. Fictitious assets, such as accumulated losses, are only written off against capitals.
• Garner v Murray: when a partner is insolvent, the solvent partners bear his deficiency in the ratio of their capitals, not their profit ratio, unless agreed otherwise.
• A partner ceases to be a partner on the date he is adjudicated insolvent (Section 34(1)).
• Highest relative capital method: the partner with the highest capital per unit of profit share is paid first.
• Proportionate capital method: surplus cash goes to partners in the ratio of their capitals (adjusted), after allowing for the loss still to come.

Common mistakes

• Treating retirement or death of a partner as dissolution of the firm. Fix: Apply Section 39. If the remaining partners continue, only the partnership changes. The firm is dissolved only when the partnership between all partners ends.
• Saying a notice can be oral under Section 43. Fix: Section 43 requires notice in writing to all the other partners.
• Paying partners' capital before partners' loans Fix: Under Section 48(b), advances come before capital. Pay loans first unless the agreement says otherwise.
• Adding a partner's loan into his capital account Fix: Keep the loan in its own account. Only capital accounts take the share of realisation loss and reserves.
• Transferring cash, bank balance or partners' capital to the Realisation Account. Fix: Only non-cash assets and outside liabilities go to Realisation A/c. Cash and bank stay in the Bank A/c. Capital and reserves go to the partners' accounts.
• Using the book value instead of the agreed value when a partner takes over an asset. Fix: Credit Realisation A/c with the agreed takeover value. The difference from book value then shows up as profit or loss.
• Sharing the insolvent partner's deficiency in the profit-sharing ratio. Fix: Split the work in two. Realisation loss goes in the profit ratio. The unrecovered deficiency of the insolvent partner goes in the capital ratio of the solvent partners, unless the question gives another rule.
• Using capitals after the realisation loss to find the capital ratio. Fix: Use the capitals before dissolution, adjusted for reserves, accumulated profits or losses and drawings, but before any realisation loss.
• Dividing capital by the profit share as a fraction or percentage but then using the wrong multiplier for the level amount. Fix: Use ratio parts throughout (3, 2, 1). Multiply the difference in relative capital by the sum of parts of the partners who are at the top.
• Ranking partners on capital alone, without dividing by profit share. Fix: Always compute capital ÷ ratio part. A partner with a smaller capital can have a higher relative capital.

Exam tips

• Write the section number with the rule only for the sections you are sure of: 39, 43, 44, 48 and 55 are safe.
• For MCQs, test the condition words: 'at will', 'in writing', 'other than the partner suing'.
• In a 14-mark answer, list all grounds (a) to (g) of Section 44 in short form, then add one line on each.
• Always draw the line between dissolution of partnership and dissolution of the firm. It is a favourite theory question.
• Link to the next steps: mention settlement under Section 48 and goodwill under Section 55 in one line when asked about consequences.
• In MCQs, the usual trap is the order: outside creditors, then partners' loans, then partners' capital. Learn it as 'outsiders, loans, capital, residue'.
• Write Section 48 as a short note in written answers: say the rules apply subject to agreement, and state the order clearly. This earns the theory marks.
• Always show the Realisation Account, the Capital Accounts and the Cash Account. Step marks come from each working, and the Cash Account must close at nil.