Accounting · Partnership and LLP Accounts

Dissolution of a Partnership Firm: Realisation Account, Garner v Murray and Piecemeal Distribution

Updated 1 October 2026 · Fact-checked

Dissolution of a partnership firm ends the firm's business, and you settle the accounts through a realisation account. Transfer assets and outside liabilities to it, record sales, payments and expenses, then move the profit or loss to partners' capital. Pay outsiders first, then partners' loans, then capital. If a partner is insolvent, apply Garner v Murray.

Understand Dissolution of a Partnership Firm

A firm is dissolved when the partnership between all partners ends. The firm then sells its assets, pays its debts and returns what is left to the partners. Your job in the exam is to show this settlement in the books.

The main tool is the realisation account. It works like a scoreboard. Assets (except cash and bank) go to its debit at book value. Outside liabilities go to its credit at book value. Then you record what actually happened: assets sold, assets taken over by partners, liabilities paid, and expenses of dissolution. The balancing figure is the profit or loss on realisation. It is shared by the partners in their profit-sharing ratio.

Before the realisation account, you deal with items that are not realised. Accumulated profits, reserves and undistributed profit go to the partners' capital accounts in the profit-sharing ratio. Accumulated losses and fictitious assets (such as deferred expenses or the debit balance of the P&L account) go to the partners' capital accounts the same way.

The order of payment matters. Cash is applied first to outside liabilities, then to partners' loans (a loan from a partner ranks before his capital), then to partners' capital. The law on this is in the Indian Partnership Act, Section 48. A partner's loan is not an outside liability for the realisation account. Pay it from cash directly.

If a partner's capital account ends with a debit balance and he cannot pay it because he is insolvent, the other partners bear the loss. Under Garner v Murray, the solvent partners bear it in the ratio of their last agreed capitals, not in the profit-sharing ratio. If cash comes in over time, the firm may pay partners in instalments. This is piecemeal distribution.

Key rules to remember

Realisation account: debit side: Dr: assets (excluding cash/bank and fictitious assets) at book value + cash paid for liabilities + realisation expenses paid by the firm + partner's remuneration for dissolution (if agreed); Fictitious assets and accumulated losses go to partners' capital accounts, not to realisation.
Realisation account: credit side: Cr: outside liabilities at book value + cash received on sale of assets + assets taken over by partners at agreed value; Do not put partners' capital, partners' loans or reserves here. If a partner takes over a liability, debit the realisation account with the amount at which he takes it over and credit that partner's capital account. No cash entry is made.
Profit or loss on realisation: Profit or loss = Total credit side − Total debit side; shared in the profit-sharing ratio; If credits exceed debits, it is a profit. Credit partners' capital for a profit and debit it for a loss.
Order of payment (Section 48 of the Indian Partnership Act): 1. Outside creditors → 2. Partners' loans and advances → 3. Partners' capital → 4. Surplus, if any, to partners in profit ratio; This applies unless the partners have agreed otherwise.
Partner's capital closing balance: Capital + share of reserves/profits − share of accumulated losses − share of realisation loss (+ share of profit) − assets taken over + liabilities taken over ± other items = amount paid to (or brought in by) the partner; A credit balance is paid out. A debit balance must be brought in by the partner.
Garner v Murray rule: Deficiency of insolvent partner is borne by solvent partners in the ratio of their last agreed capitals; Use the capitals as per the last balance sheet before dissolution, after adjusting for reserves, accumulated profits/losses and later changes. Do not use the profit-sharing ratio. The deed can say otherwise.
Maximum loss method (piecemeal distribution): At each instalment, assume the remaining assets realise nil; the loss is shared by the partners; a partner with a credit balance after that is paid; This avoids overpaying any partner early.

How to solve Dissolution of a Partnership Firm questions

Use this order for any dissolution question. It keeps the entries complete and helps you earn step marks.

1Read the question and note the profit-sharing ratio, the capitals (fixed or fluctuating), and what is given about realisation values, take-overs, expenses and any insolvent partner.
2Deal with non-realisation items first. Transfer reserves, accumulated profits and losses, and fictitious assets to the partners' capital accounts in the profit-sharing ratio.
3Open the realisation account. Debit all assets except cash/bank and fictitious assets at book value. Credit all outside liabilities at book value. Leave partners' loans out.
4Record the actual events. Credit sale proceeds of assets. Credit assets taken over by partners at the agreed value (debit that partner's capital). Debit payments to liabilities. Debit realisation expenses paid by the firm.
5Balance the realisation account. Transfer the profit or loss to the partners' capital accounts in the profit-sharing ratio.
6Pay the partner's loan from cash. Then complete the capital accounts and get closing balances.
7If a partner has a debit balance and is insolvent, share that debit among solvent partners in their last agreed capital ratio (Garner v Murray). Then prepare the cash or bank account and settle the final payments.
8Check that the cash or bank account balances to nil after all payments. This is your proof that the answer is right.

Quickest way: Three-account shortcut with a cash check

When to use it: Use this when you have about 12 to 15 minutes for a dissolution question with several items.

Draw the balance sheet items in a list and tick each one off as you use it: asset to realisation, liability to realisation, reserve to capital, loan to cash payment.
Write the realisation account in two columns of totals first. Add book values of assets on the left and liabilities on the right, then add the actual events.
Fill the capital accounts in columns, one column per partner, so you can add across. Use the same layout for every question.
Prepare the cash account last. If the closing cash is not nil, hunt for a missed entry such as the loan, an expense or the take-over.
Show working notes for the profit ratio split and the Garner ratio. Even if one figure goes wrong, the method marks stay.

Common mistakes in Dissolution of a Partnership Firm

Putting partners' capital, reserves or partner's loan on the realisation account.
You treat every balance sheet item as an asset or liability to be realised.
Fix: Only external assets and external liabilities go to realisation. Capital, reserves and a partner's loan are settled through the capital accounts or cash.
Including cash and bank balances in the realisation account.
They look like assets, so they get moved with the rest.
Fix: Cash and bank are never transferred. They are used to make payments in the cash account.
Sharing the insolvent partner's deficiency in the profit-sharing ratio.
You use the ratio you used all through the question.
Fix: Use the ratio of last agreed capitals of the solvent partners only, unless the question says otherwise.
Paying the partner's loan after the partner's capital.
You treat the loan as part of the partner's total claim.
Fix: The loan is a liability of the firm to the partner. Pay it after outsiders and before any capital is returned.
Forgetting the asset taken over by a partner.
No cash moves, so it is easy to skip.
Fix: Credit realisation with the agreed value and debit that partner's capital account. Do not enter it in the cash account.
Missing the realisation expenses or booking them twice.
The question may say the expenses were paid by a partner or by the firm, and you copy the wrong treatment.
Fix: If the firm pays, debit realisation and credit cash. If a partner pays and is reimbursed by the firm, treat as paid by the firm. If a partner bears them under agreement, no entry is needed in the firm's books.

Worked examples

Example 1

A and B share profits in the ratio 3:2. Their balance sheet on the date of dissolution: Capitals: A ₹80,000; B ₹60,000. Creditors ₹40,000; B's Loan ₹20,000; General Reserve ₹10,000. Assets: Cash ₹10,000; Debtors ₹50,000; Stock ₹60,000; Machinery ₹70,000; Furniture ₹20,000. The firm is dissolved. Debtors realise ₹45,000; stock is sold for ₹55,000; A takes over machinery at ₹65,000; furniture is sold for ₹15,000. Creditors are paid ₹39,000 in full settlement. Realisation expenses of ₹3,000 are paid by the firm. Prepare the realisation account, the partners' capital accounts and the cash account.

Show the solution

General reserve ₹10,000 goes to capital in the ratio 3:2: A gets ₹6,000 and B gets ₹4,000.
Realisation account, debit side: Debtors ₹50,000; Stock ₹60,000; Machinery ₹70,000; Furniture ₹20,000; Cash (creditors paid) ₹39,000; Cash (expenses) ₹3,000. Total ₹2,42,000.
Realisation account, credit side: Creditors ₹40,000; Cash (debtors) ₹45,000; Cash (stock) ₹55,000; A's capital (machinery) ₹65,000; Cash (furniture) ₹15,000. Total ₹2,20,000.
Loss on realisation = ₹2,42,000 − ₹2,20,000 = ₹22,000. A bears 3/5 = ₹13,200 and B bears 2/5 = ₹8,800.
A's capital: ₹80,000 + ₹6,000 − ₹13,200 − ₹65,000 = ₹7,800 (credit).
B's capital: ₹60,000 + ₹4,000 − ₹8,800 = ₹55,200 (credit).
Cash account: opening ₹10,000 + debtors ₹45,000 + stock ₹55,000 + furniture ₹15,000 = ₹1,25,000 received.
Payments: creditors ₹39,000; expenses ₹3,000; B's loan ₹20,000; A ₹7,800; B ₹55,200. Total ₹1,25,000. Cash balance is nil, so the work is correct.

Answer: Loss on realisation is ₹22,000 (A ₹13,200, B ₹8,800). Final payments: B's loan ₹20,000, A ₹7,800 and B ₹55,200. The cash account closes at nil.

Example 2

A, B and C share profits equally. Their last agreed capitals were A ₹60,000, B ₹40,000 and C ₹10,000. Creditors are ₹40,000 and the other assets (all assets are non-cash) have a book value of ₹1,50,000. On dissolution, the assets realise ₹90,000 and the creditors are paid in full. There are no expenses. C is insolvent and cannot pay anything. Show how the loss is shared and find the final amounts paid to A and B.

Show the solution

Loss on realisation = ₹1,50,000 − ₹90,000 = ₹60,000. Each partner bears ₹20,000 (equal ratio).
C's capital: ₹10,000 − ₹20,000 = ₹10,000 debit balance. C is insolvent, so this is a deficiency of ₹10,000.
Garner v Murray: solvent partners A and B bear the deficiency in their last agreed capital ratio, which is 60,000 : 40,000 = 3 : 2.
A bears ₹10,000 × 3/5 = ₹6,000. B bears ₹10,000 × 2/5 = ₹4,000.
A's capital: ₹60,000 − ₹20,000 − ₹6,000 = ₹34,000.
B's capital: ₹40,000 − ₹20,000 − ₹4,000 = ₹16,000.
Check with cash: ₹90,000 realised − ₹40,000 paid to creditors = ₹50,000. A ₹34,000 + B ₹16,000 = ₹50,000. This matches.

Answer: C's deficiency of ₹10,000 is borne by A ₹6,000 and B ₹4,000 (ratio 3:2). The firm pays A ₹34,000 and B ₹16,000.

Exam tips

Always check whether the question gives the balance sheet on the date of dissolution. If capitals are fluctuating, use the balances after adjusting reserves. Do not use them from an earlier year.
Write the Garner ratio as a working note before you use it. The examiner can then see the ratio and give marks even if a later figure is wrong.
Look for the wording on partner's loan, expenses and take-overs. These small items decide whether the cash account balances.
If the question says nothing about the insolvent partner's private estate, assume he pays nothing unless a dividend or amount is given.
Use the cash account as your final check. If it does not close at nil, one entry is missing.

Practice questions from Partnership and LLP Accounts

Under the Limited Liability Partnership Act, 2008, which statement about designated partners of an LLP is correct?

Dissolution of a Partnership Firm: frequently asked questions

What is the format of a realisation account?

It is a T-account. The debit side shows assets at book value, payments to liabilities and expenses. The credit side shows liabilities at book value, cash from asset sales and assets taken over by partners. The balancing figure is the profit or loss, shared by the partners.

How do I treat an asset taken over by a partner?

Credit the realisation account with the agreed value and debit that partner's capital account. No cash is received, so do not put it in the cash account. If the partner takes over a liability too, adjust his capital account for it.

What is the Garner v Murray rule?

When a partner is insolvent and cannot pay his capital deficiency, the solvent partners bear it in the ratio of their last agreed capitals. They do not use the profit-sharing ratio. The partnership deed can set a different rule, and then the deed prevails.

Where does a partner's loan come in the order of payment?

A partner's loan is paid after outside creditors and before the return of partners' capital. It is not shown on the realisation account. You pay it directly from cash in the cash account.

What is piecemeal distribution?

It is when the firm distributes cash to partners in instalments as assets are sold, instead of waiting for all assets to be realised. The maximum loss method is often used to decide who is paid in each instalment, so that no partner is overpaid.