CMA Intermediate · Financial Accounting

Dissolution of Partnership Firms including Piecemeal Distribution

Dissolution of a partnership firm means the partnership between all partners ends. You close the books through a realisation account, then settle in the order the Indian Partnership Act, 1932 sets in Section 48: outside debts, partners' loans, capital, then residue in profit ratio. If cash arrives in instalments, use piecemeal distribution.

What this chapter covers

This chapter covers what happens to a partnership's books when the firm ends. Under Section 39 of the Indian Partnership Act, 1932, dissolution of the firm is the dissolution of partnership between all the partners. You then wind up: sell or take over assets, pay liabilities, close partners' accounts and settle the balance in cash.

The chapter has three layers. First, the legal rules: the modes of dissolution and the order of settlement under Section 48. Second, the accounting mechanics: the realisation account, partners' capital accounts and the cash or bank account. Third, the harder cases: a partner who is insolvent (Garner v Murray) and a firm whose assets are sold slowly, so cash is paid to partners in instalments (piecemeal distribution).

It connects directly to the rest of Financial Accounting. It builds on partnership basics, admission, retirement and death of a partner, where you already adjust goodwill, revalue assets and settle capitals. Dissolution takes the same skills to the end point. The numerical questions here are long, so they reward a clean layout and a fixed sequence of steps.

Dissolution questions are multi-step numericals, and ICMAI rewards each correct step: the realisation account, the partners' capital accounts, the cash account and the working notes. If your layout is right, you collect marks even when one figure goes wrong. The chapter also gives easy Section A MCQs, such as the order of payment, who bears an insolvent partner's deficiency and which partner is paid first in piecemeal distribution. The six topics fit together, so a few days of focused practice make the whole chapter predictable.

Dissolution of Partnership Firms including Piecemeal Distribution: topics in the order to study them

1Dissolution of Partnership Firm: Meaning and ModesStart with the definition and the ways a firm ends, such as agreement, notice for a partnership at will (Section 43), compulsory events and court order, so the later accounting has a legal base.
2Settlement of Accounts and Order of PaymentSection 48 fixes who gets paid first and how losses are borne. Every later topic uses this order.
3Realisation Account and Closing EntriesThis is the core numerical skill: transferring assets and liabilities, recording proceeds and expenses, and closing the partners' accounts. Practise it until it is automatic.
4Insolvency of Partners and Garner v Murray RuleOnce the basic closing is clear, learn what changes when a partner cannot pay the deficiency in his capital account.
5Piecemeal Distribution: Highest Relative Capital MethodLearn the first instalment method after the normal closing is fixed, since it needs capitals, profit ratios and a clear idea of losses still to come.
6Piecemeal Distribution: Proportionate Capital MethodStudy this last and compare it with the first method, so you can tell the two apart and choose the one the question asks for.

How to prepare Dissolution of Partnership Firms including Piecemeal Distribution

Treat this chapter as a procedure you can repeat, not a set of facts to memorise. The aim is to produce the same neat layout every time.

Read Sections 39, 43, 46 and 48 of the Indian Partnership Act, 1932 once in plain words. Be able to state the order of payment from memory: outside debts, partners' advances (loans), partners' capital, then residue in profit ratio.
Write one fixed sequence for every dissolution problem: realisation account, partners' capital accounts, bank or cash account. Note the opening balances and any adjustments (reserves, accumulated profits, partners' loans) before you start.
Practise the realisation account on its own with different cases: assets sold at a gain or loss, assets taken over by a partner, unrecorded assets and liabilities, realisation expenses borne by the firm or by a partner. Check that the realisation account debit and credit sides carry the right items.
Do the insolvency problems. Find the deficiency in the insolvent partner's capital account first, then divide it among the solvent partners in the ratio of their capitals, as in Garner v Murray, unless the question says otherwise. Show that ratio in a working note.
For piecemeal distribution, build a statement for each instalment. For the highest relative capital method, compute each partner's capital relative to his profit share and pay the highest first. For the proportionate capital method, pay the surplus in the ratio of capitals after providing for the loss that may still arise. Always check that the total paid equals the cash available.
Finish with timed mixed practice. Solve three full questions in a sitting, then verify that the capital accounts end at nil and the cash account balances.
In the last days, practise MCQs on the order of payment, the treatment of partners' loans and the insolvency rule, so these two-mark questions are quick.

Common mistakes in Dissolution of Partnership Firms including Piecemeal Distribution

Paying capital before partners' loans, or paying partners before outside creditors
Fix: Write the Section 48 order at the top of your answer: outside debts, partners' loans, capital, residue. Check your cash account follows it.
Sharing the insolvent partner's deficiency in profit ratio
Fix: For Garner v Murray cases, find the deficiency, then divide it among the solvent partners in the ratio of their capitals. Do this unless the question gives a different agreement.
Transferring cash and bank balances to the realisation account
Fix: Transfer only assets other than cash and bank, and exclude fictitious assets. Cash stays in the cash account to settle the partners at the end.
Forgetting unrecorded assets, unrecorded liabilities, or realisation expenses
Fix: Tick each note in the question after posting it. Record unrecorded items only when they are realised or paid, and show who bears the realisation expenses.
Mixing up the two piecemeal methods
Fix: Keep a one-line rule for each. Highest relative capital: pay the partner with the highest capital relative to profit share first. Proportionate capital: pay in the ratio of capitals, allowing for the loss still to come. Read the question for the method it names.
Not checking that the capital accounts close at nil and cash is fully used
Fix: After the last entry, confirm that every partner's capital account balances to zero and that the total cash paid equals the cash available. If not, trace the error before moving on.

Last-day revision: Dissolution of Partnership Firms including Piecemeal Distribution

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.

Dissolution of Partnership Firms including Piecemeal Distribution practice questions

Dissolution of Partnership Firms including Piecemeal Distribution in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dissolution of Partnership Firms including Piecemeal Distribution: frequently asked questions

What is the order of payment when a partnership firm is dissolved?

Under Section 48 of the Indian Partnership Act, 1932, and subject to the partners' agreement, the firm's assets first pay debts to third parties. Next come partners' advances (loans), then partners' capital rateably. Any residue is divided in profit-sharing ratio.

How are losses and capital deficiencies handled after dissolution?

Section 48 says losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they shared profits. The partners' own agreement can change this.

What is the Garner v Murray rule?

It deals with a partner who is insolvent and cannot pay the deficiency in his capital account. The solvent partners bear that deficiency in the ratio of their capitals, not in their profit-sharing ratio. Use this ratio unless the question states a different agreement.

Which piecemeal distribution method should I use in the exam?

Use the method the question names. If it does not name one, read the instruction carefully and state the method you are using. Whichever you choose, make sure the instalments never exceed the cash available.

Does a firm need to be registered to be dissolved or to settle accounts?

Section 69(3)(a) says the bar on suits by an unregistered firm does not affect the right to sue for dissolution of a firm or for accounts of a dissolved firm. It also leaves intact the power to realise the property of a dissolved firm.