Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

Piecemeal Distribution: Highest Relative Capital Method

Updated 10 October 2026 · Fact-checked

Piecemeal distribution means paying partners cash in instalments as assets are sold, instead of waiting for the final realisation. Under the highest relative capital method, you divide each partner's capital by his profit share, pay the highest figure first until it falls to the next level, then pay those partners together in profit ratio.

Understand Piecemeal Distribution: Highest Relative Capital Method

When a firm is dissolved, assets are often sold over weeks or months. Partners do not want to wait for the last sale. So the firm pays out cash in instalments as it realises assets. This is piecemeal distribution.

The cash cannot go to partners in any order. First pay realisation expenses and outside liabilities. Then pay partners' loans. Only the balance goes to partners towards their capital.

The real question is: which partner gets the cash first? Losses on assets are shared in the profit-sharing ratio. A partner who has put in a lot of capital compared with his profit share is the one who has already been 'over-funding' the firm. If cash is shared simply by capital, a partner with a small capital but a large profit share may later owe money. So you compare capital relative to profit share.

The highest relative capital method does this. Divide each partner's capital (after his share of the loss on assets realised so far) by his profit-sharing ratio part. The partner with the highest figure is paid first, until his figure falls to the second-highest. Then both are paid in profit ratio until they fall to the third level, and so on. When all figures are equal, cash is shared in profit ratio.

A statement of distribution records each instalment, the cash available, the levels, and how much each partner receives. Prepare it fresh for each instalment, using the capitals left after the previous payment and the loss on the assets sold in the current instalment. Follow any special instruction in the question about how losses or unsold assets are to be treated.

Key rules to remember

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.

How to solve Piecemeal Distribution: Highest Relative Capital Method questions

Use this method for any piecemeal distribution question. Work instalment by instalment and keep a running statement.

1List the profit-sharing ratio and each partner's opening capital. Add or deduct any adjustments given, such as reserves, undistributed profits or drawings.
2For the first instalment, find the loss (or gain) on the assets realised. Share it in profit ratio and deduct it from each capital.
3Find the cash available: cash realised less expenses, outside liabilities and partners' loans due. Only this balance is for partners' capital.
4Divide each adjusted capital by the partner's ratio part. Rank the results from highest to lowest.
5Pay the highest partner first: (highest − next) × his ratio part. If cash runs out, he gets all the cash. If two partners tie at the top, pay them together in their ratio.
6Continue down the levels, adding partners to the group each time, until all relative capitals are equal. Any remaining cash is shared in the full profit ratio.
7Deduct payments from capitals to get the new balances. Repeat steps 2 to 6 for the next instalment.
8At the end, check that the total paid to each partner equals his capital after his full share of the total loss, and that the total cash distributed equals the total cash realised less liabilities.

Quickest way: Level-by-level shortcut

When to use it: Use it when the question gives clear instalment data and you want to avoid a long ledger. It works best with two or three partners.

Write the ratio parts and adjusted capitals in a row. Write the relative capitals just below them.
Mark the levels. Compute the 'cost' of each level, such as (37,000 − 32,000) × 3 = 15,000.
Pour the instalment cash down the levels. Stop where the cash ends. Split each level's amount in ratio among the partners at that level.
Subtract payments to get new capitals. If every relative capital is now equal, the next instalment is simply shared in profit ratio after adjusting for its loss.
Cross-check: the total paid in the instalment must equal the cash available.

Common mistakes in Piecemeal Distribution: Highest Relative Capital Method

Dividing capital by the profit share as a fraction or percentage but then using the wrong multiplier for the level amount.
Students mix ratio parts and fractions, so the 'cost' of a level comes out wrong.
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.
It looks natural that the biggest capital is paid first.
Fix: Always compute capital ÷ ratio part. A partner with a smaller capital can have a higher relative capital.
Paying partners before outside liabilities and partners' loans.
Students jump to the statement of distribution as soon as cash arrives.
Fix: Deduct expenses, creditors and partners' loans first. Only the balance goes to capital.
Not deducting the loss on realisation from capitals before ranking.
The question gives book values and cash realised separately, and the loss is overlooked.
Fix: For each instalment, compute loss = book value − cash realised. Share it in profit ratio and reduce capitals first.
Splitting a level's amount equally, or in capital ratio, among the partners at that level.
The word 'together' is read as 'equally' or by capital.
Fix: Partners at the same level share in their profit-sharing ratio among themselves.
Starting each instalment from the original capitals instead of the balances left.
The earlier payments are not carried forward in the statement.
Fix: Keep a running 'capital after payment' line and start every new instalment from it.

Worked examples

Example 1

A, B and C share profits in the ratio 3:2:1. On dissolution, their capitals are A ₹1,50,000, B ₹80,000 and C ₹30,000, and creditors are ₹30,000. Assets total ₹2,90,000 at book value. Assets are realised in three instalments: (1) book value ₹1,00,000 realised for ₹82,000; (2) book value ₹88,000 realised for ₹70,000; (3) book value ₹1,02,000 realised for ₹84,000. Creditors are paid from the first instalment. Ignore expenses. Prepare a statement of distribution using the highest relative capital method.

Show the solution

Check: capitals 2,60,000 + creditors 30,000 = ₹2,90,000 = total book value of assets (1,00,000 + 88,000 + 1,02,000).
Instalment 1. Loss = 1,00,000 − 82,000 = ₹18,000. Shared 3:2:1: A ₹9,000, B ₹6,000, C ₹3,000.
Capitals after loss: A 1,50,000 − 9,000 = ₹1,41,000; B 80,000 − 6,000 = ₹74,000; C 30,000 − 3,000 = ₹27,000.
Relative capitals: A 1,41,000 ÷ 3 = 47,000; B 74,000 ÷ 2 = 37,000; C 27,000 ÷ 1 = 27,000.
Cash available = 82,000 − 30,000 (creditors) = ₹52,000.
Level 1: A from 47,000 to 37,000 costs (47,000 − 37,000) × 3 = ₹30,000, all to A. Cash left = 52,000 − 30,000 = ₹22,000.
Level 2: A and B from 37,000 to 27,000 would cost 10,000 × (3 + 2) = ₹50,000. Cash left is only ₹22,000, so share it 3:2: A ₹13,200, B ₹8,800. C gets nil.
Paid in instalment 1: A 30,000 + 13,200 = ₹43,200; B ₹8,800; C nil. Total ₹52,000.
Capitals after payment: A 1,41,000 − 43,200 = ₹97,800; B 74,000 − 8,800 = ₹65,200; C ₹27,000. Relative: A 32,600; B 32,600; C 27,000.
Instalment 2. Loss = 88,000 − 70,000 = ₹18,000: A 9,000, B 6,000, C 3,000. Capitals: A ₹88,800; B ₹59,200; C ₹24,000. Relative: A 29,600; B 29,600; C 24,000.
Cash available = ₹70,000 (no liabilities left). Level 1: A and B from 29,600 to 24,000 costs 5,600 × (3 + 2) = ₹28,000: A ₹16,800, B ₹11,200.
Cash left = 70,000 − 28,000 = ₹42,000. All three are now at 24,000, so share 3:2:1: A ₹21,000, B ₹14,000, C ₹7,000.
Paid in instalment 2: A 16,800 + 21,000 = ₹37,800; B 11,200 + 14,000 = ₹25,200; C ₹7,000. Total ₹70,000.
Capitals after payment: A 88,800 − 37,800 = ₹51,000; B 59,200 − 25,200 = ₹34,000; C 24,000 − 7,000 = ₹17,000. Relative 17,000 each.
Instalment 3. Loss = 1,02,000 − 84,000 = ₹18,000: A 9,000, B 6,000, C 3,000. Capitals: A ₹42,000; B ₹28,000; C ₹14,000. Total ₹84,000 equals cash realised, so each partner is paid his capital.
Check: A total = 43,200 + 37,800 + 42,000 = ₹1,23,000 (1,50,000 − 27,000 share of total loss). B total = 8,800 + 25,200 + 28,000 = ₹62,000 (80,000 − 18,000). C total = 0 + 7,000 + 14,000 = ₹21,000 (30,000 − 9,000). Total ₹2,06,000 = cash realised 2,36,000 − creditors 30,000.

Answer: A receives ₹43,200, ₹37,800 and ₹42,000 (total ₹1,23,000). B receives ₹8,800, ₹25,200 and ₹28,000 (total ₹62,000). C receives nil, ₹7,000 and ₹14,000 (total ₹21,000). Total paid to partners is ₹2,06,000.

Example 2

P and Q share profits 3:2. Their capitals are P ₹1,20,000 and Q ₹60,000. Creditors are ₹20,000. Total assets are ₹2,00,000 at book value. Assets are sold in three instalments: (1) book value ₹80,000 for ₹70,000; (2) book value ₹70,000 for ₹55,000; (3) book value ₹50,000 for ₹40,000. Creditors are paid out of the first instalment. Ignore expenses. Show how cash is distributed under the highest relative capital method.

Show the solution

Instalment 1. Loss = 80,000 − 70,000 = ₹10,000. Shared 3:2: P ₹6,000, Q ₹4,000.
Capitals after loss: P 1,20,000 − 6,000 = ₹1,14,000; Q 60,000 − 4,000 = ₹56,000.
Relative capitals: P 1,14,000 ÷ 3 = 38,000; Q 56,000 ÷ 2 = 28,000.
Cash available = 70,000 − 20,000 (creditors) = ₹50,000.
Level 1: P from 38,000 to 28,000 = 10,000 × 3 = ₹30,000, all to P.
Balance cash = 50,000 − 30,000 = ₹20,000. Both are now at 28,000, so share 3:2: P ₹12,000, Q ₹8,000.
Paid in instalment 1: P 30,000 + 12,000 = ₹42,000; Q ₹8,000. Total ₹50,000.
Capitals after payment: P 1,14,000 − 42,000 = ₹72,000; Q 56,000 − 8,000 = ₹48,000. Relative 24,000 each.
Instalment 2. Loss = 70,000 − 55,000 = ₹15,000: P 9,000, Q 6,000. Capitals: P ₹63,000; Q ₹42,000. Relative 21,000 each, so cash ₹55,000 is shared 3:2: P ₹33,000, Q ₹22,000.
Capitals after payment: P 63,000 − 33,000 = ₹30,000; Q 42,000 − 22,000 = ₹20,000.
Instalment 3. Loss = 50,000 − 40,000 = ₹10,000: P 6,000, Q 4,000. Capitals: P ₹24,000; Q ₹16,000. Total ₹40,000 equals cash, so P gets ₹24,000 and Q ₹16,000.
Check: P total = 42,000 + 33,000 + 24,000 = ₹99,000. Q total = 8,000 + 22,000 + 16,000 = ₹46,000. Total ₹1,45,000 = cash realised 1,65,000 − creditors 20,000.

Answer: P receives ₹42,000, ₹33,000 and ₹24,000 (total ₹99,000). Q receives ₹8,000, ₹22,000 and ₹16,000 (total ₹46,000). Total paid to partners is ₹1,45,000.

Exam tips

Draw the statement of distribution with columns for each partner and rows for capital, loss, relative capital, payment and balance. Step marks are given for the layout and for each correct level.
Always show the cash available line first: cash realised less expenses, liabilities and partners' loans. Many errors start here.
Show the working of each level amount, such as (38,000 − 28,000) × 3 = 30,000. Even if a later number is wrong, you keep the method marks.
In MCQs, the usual traps are: who is paid first, and how much is paid in the first level. Compute capital ÷ ratio part for each partner before looking at the options.
End each answer with a proof: total paid equals total cash realised less liabilities, and each partner's total payments match his final capital.

Practice questions from Dissolution of Partnership Firms including Piecemeal Distribution

Piecemeal Distribution: Highest Relative Capital Method: frequently asked questions

What is the highest relative capital method in piecemeal distribution?

It is a method of paying partners in instalments. You divide each partner's capital by his profit-sharing ratio part and pay the partner with the highest figure first. Once his figure falls to the next level, both are paid together in profit ratio, and so on.

Why is capital divided by profit share?

Losses are shared in the profit ratio. Dividing capital by the ratio part shows how much each partner has put in per unit of loss-bearing. The partner with the most capital per unit is the safest to repay first.

Do I pay partners' loans before capital?

Yes. After realisation expenses and outside liabilities, partners' loans are repaid. Only the balance cash is distributed to partners towards their capital using the highest relative capital method.

How is this different from the proportionate capital method?

In the proportionate capital method, cash is shared in the ratio of capitals, and the final adjustment is made at the end. In the highest relative capital method, cash is paid level by level, starting with the partner whose capital is highest relative to his profit share.