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Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

Piecemeal Distribution: Proportionate Capital (Maximum Loss) Method

Updated 10 October 2026 · Fact-checked

The proportionate capital (maximum loss) method pays surplus cash to partners in instalments without risking overpayment. At each stage, assume all unsold assets are lost, charge that loss to partners in profit ratio, and pay each partner only the positive balance left. A partner's deficiency is borne by the others in capital ratio.

Understand Piecemeal Distribution: Proportionate Capital Method

When a firm is dissolved, assets are often sold over several months. Partners do not want to wait until the last asset is sold to receive money. Piecemeal distribution means you pay out cash in instalments as it comes in. The risk is overpaying a partner early, because later sales may bring in less than expected.

The maximum loss method removes this risk. At every instalment you take the worst case: all assets still unsold will realise nothing. You charge that imaginary loss to the partners in their profit-sharing ratio. A partner whose capital still exceeds his share of the loss is safe to be paid that excess. Nobody is paid more than he could ever be entitled to.

Sometimes a partner's capital is smaller than his share of the maximum loss. He shows a deficiency. You do not pay him anything. His deficiency is assumed to fall on the other partners, so you deduct it from them in the ratio of their capitals. This is the same principle as the rule for an insolvent partner in Garner v Murray. If the deficient partner later turns out to be able to pay, the amount is recovered and shared out again.

The method is also called the proportionate capital method. It gives the same final payments as the highest relative capital method.

Payment priority never changes. Realisation expenses and outside liabilities come first, then partners' loans, then partners' capital. Only the last stage is spread among partners by the maximum loss working.

Key rules to remember

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.

How to solve Piecemeal Distribution: Proportionate Capital Method questions

Use a fresh working for every instalment. Keep a running statement of capitals, because each instalment depends on what has already been paid and what has been lost.

  1. 1Write down the opening capitals, the profit-sharing ratio, outside liabilities and the book value of all assets.
  2. 2For each instalment, find the cash available. Pay realisation expenses and outside liabilities first, then partners' loans. The rest is surplus for partners' capital.
  3. 3Charge the actual loss or profit on assets sold in this instalment to the partners in profit ratio. Update each partner's capital and deduct cash already paid.
  4. 4Compute the maximum loss: the book value of assets still unsold. Divide it among partners in profit ratio.
  5. 5Deduct each partner's share of maximum loss from his updated capital. A positive result is what he can safely receive. A negative result is a deficiency.
  6. 6If there is a deficiency, share it among the other partners in the ratio of their capitals and deduct it from their balances. Pay the deficient partner nothing. Repeat the check if another partner turns negative.
  7. 7Check that the total paid equals the surplus cash. Show the payments in a statement, with a column for each partner and each instalment.
  8. 8At the final instalment, nothing is unsold, so the maximum loss is nil. Pay the capital balances left. If a partner's balance is negative, his deficiency falls on the others in capital ratio (or he brings it in if solvent).

Quickest way: Cumulative entitlement shortcut

When to use it: Use this when there are three or more instalments and no partner's loan complicates the order. It cuts out repeating the full working.

  1. After each instalment, find the cumulative loss: actual losses on assets sold so far plus the book value of assets still unsold.
  2. Each partner's cumulative entitlement = Capital − Share of cumulative loss (profit ratio).
  3. Instalment payable = Cumulative entitlement − Cash already paid to him.
  4. If any entitlement is negative, set it to nil and share that deficiency among the other partners in capital ratio.
  5. Check that payments total the surplus cash. If not, you have missed a deficiency or an earlier payment.

Common mistakes in Piecemeal Distribution: Proportionate Capital Method

  • Distributing cash to partners before paying outside creditors

    Students see surplus cash and go straight to the capital working.

    Fix: First clear realisation expenses and liabilities, then partners' loans. Only the remaining cash is surplus for capital.

  • Sharing a partner's deficiency in profit ratio

    Students are used to profit ratio for everything in accounts.

    Fix: Deficiency is shared by the other partners in the ratio of their capitals. Profit ratio is used only for the maximum loss.

  • Ignoring actual losses from earlier realisations

    Students start from the original capital each time and only apply the maximum loss.

    Fix: Keep a running capital statement. Deduct actual losses so far and cash already paid before applying the new maximum loss.

  • Paying a partner whose balance is negative or reducing his payment below nil

    Students forget that a negative figure means a deficiency, not a payment or a recovery.

    Fix: Show nil as the payment. Move the negative amount to the other partners and recompute their balances.

  • Using the estimated value of unsold assets in the maximum loss

    Students confuse maximum loss with expected loss.

    Fix: Maximum loss uses the full book value of assets still unsold, as if they realise nothing.

  • Not cross-checking total payments with cash available

    The working is long and small slips go unnoticed.

    Fix: After every instalment, add the partners' payments and agree them to surplus cash.

Worked examples

Example 1

A, B and C share profits equally. Their capitals at dissolution are A ₹60,000, B ₹40,000 and C ₹20,000. Creditors are ₹30,000. Assets other than cash have a book value of ₹1,50,000. Realisations: first instalment ₹60,000 from assets of book value ₹60,000; second instalment ₹30,000 from assets of book value ₹45,000; third instalment ₹36,000 from the remaining assets of book value ₹45,000. Ignore expenses. Show the distribution of cash using the maximum loss method.

Show the solution
  1. Instalment 1: cash ₹60,000. Pay creditors ₹30,000. Surplus ₹30,000. There is no loss on assets sold. Unsold assets are ₹90,000, so the maximum loss is ₹90,000, which is ₹30,000 for each partner.
  2. Balances: A ₹60,000 − ₹30,000 = ₹30,000. B ₹40,000 − ₹30,000 = ₹10,000. C ₹20,000 − ₹30,000 = (₹10,000), a deficiency.
  3. C's deficiency ₹10,000 is borne by A and B in capital ratio 60:40 = 3:2. A bears ₹6,000 and B bears ₹4,000. So A receives ₹24,000, B receives ₹6,000 and C receives nil. Total ₹30,000 equals the surplus.
  4. Instalment 2: cash ₹30,000. Loss on assets sold = ₹45,000 − ₹30,000 = ₹15,000, or ₹5,000 each. Capitals after loss: A ₹55,000, B ₹35,000, C ₹15,000. Less payments already made: A ₹31,000, B ₹29,000, C ₹15,000.
  5. Unsold assets are ₹45,000, so the maximum loss is ₹15,000 each. A = ₹31,000 − ₹15,000 = ₹16,000. B = ₹29,000 − ₹15,000 = ₹14,000. C = ₹15,000 − ₹15,000 = nil. Total ₹30,000 equals cash.
  6. Instalment 3: cash ₹36,000. Loss on assets = ₹45,000 − ₹36,000 = ₹9,000, or ₹3,000 each. Balances before this instalment: A ₹15,000, B ₹15,000, C ₹15,000. After the loss each has ₹12,000. Nothing is unsold, so each receives ₹12,000. Total ₹36,000.
  7. Check: A received ₹24,000 + ₹16,000 + ₹12,000 = ₹52,000. B received ₹6,000 + ₹14,000 + ₹12,000 = ₹32,000. C received ₹12,000. The total loss on realisation was ₹15,000 + ₹9,000 = ₹24,000, or ₹8,000 each. Capitals after this total loss are A ₹60,000 − ₹8,000 = ₹52,000, B ₹40,000 − ₹8,000 = ₹32,000 and C ₹20,000 − ₹8,000 = ₹12,000. These equal the total cash paid to each partner. This agrees.

Answer: Payments: Instalment 1: A ₹24,000, B ₹6,000, C nil. Instalment 2: A ₹16,000, B ₹14,000, C nil. Instalment 3: A ₹12,000, B ₹12,000, C ₹12,000. Totals: A ₹52,000, B ₹32,000, C ₹12,000.

Example 2

P, Q and R share profits 2:2:1. Capitals at dissolution are P ₹50,000, Q ₹30,000 and R ₹10,000. Creditors are ₹20,000. Assets other than cash have a book value of ₹1,10,000. First realisation: ₹40,000 from assets of book value ₹40,000. Second and final realisation: ₹10,000 from the remaining assets of book value ₹70,000. R is insolvent and nothing is recoverable from his estate. Ignore expenses. Show the distribution using the maximum loss method.

Show the solution
  1. Instalment 1: cash ₹40,000. Pay creditors ₹20,000. Surplus ₹20,000. Unsold assets ₹70,000 form the maximum loss. Shares: P ₹28,000, Q ₹28,000, R ₹14,000.
  2. Balances: P ₹50,000 − ₹28,000 = ₹22,000. Q ₹30,000 − ₹28,000 = ₹2,000. R ₹10,000 − ₹14,000 = (₹4,000).
  3. R's deficiency ₹4,000 is shared by P and Q in capital ratio 50:30 = 5:3. P bears ₹2,500 and Q bears ₹1,500. P receives ₹19,500, Q receives ₹500, R nil. Total ₹20,000 equals surplus.
  4. Instalment 2: cash ₹10,000. Loss on assets = ₹70,000 − ₹10,000 = ₹60,000. Shares: P ₹24,000, Q ₹24,000, R ₹12,000.
  5. Capitals after loss: P ₹26,000, Q ₹6,000, R (₹2,000). Less payments already made: P ₹6,500, Q ₹5,500, R (₹2,000).
  6. R's final deficiency ₹2,000 is irrecoverable. It is borne by P and Q in capital ratio 5:3. P bears ₹1,250 and Q bears ₹750. P receives ₹5,250 and Q receives ₹4,750. Total ₹10,000 equals cash.
  7. Check: P received ₹19,500 + ₹5,250 = ₹24,750. Q received ₹500 + ₹4,750 = ₹5,250. Total ₹30,000, which equals total cash ₹50,000 less creditors ₹20,000.

Answer: Instalment 1: P ₹19,500, Q ₹500, R nil. Instalment 2: P ₹5,250, Q ₹4,750, R nil. Totals: P ₹24,750, Q ₹5,250. R's deficiency of ₹2,000 is borne by P and Q in the ratio 5:3.

Exam tips

  • Draw the statement with one column per partner and one block per instalment. Marks are given for each stage of the working, so show the maximum loss, the deficiency and the payment separately.
  • Read the question for the ratio used. Maximum loss uses profit-sharing ratio. Deficiency uses capital ratio. Writing these two ratios at the top avoids mixing them up.
  • Always check that total payments equal surplus cash. This is an easy self-check and catches most errors before the examiner does.
  • If the question names a method, use it. If it says 'maximum loss' or 'proportionate capital', do not switch to the highest relative capital method. Both give the same final totals, but the working is different.
  • For an MCQ on this topic, look for the trap: a partner with a deficiency receives nothing in that instalment, and his deficiency reduces what the others receive.

Practice questions from Dissolution of Partnership Firms including Piecemeal Distribution

Piecemeal Distribution: Proportionate Capital Method: frequently asked questions

What is the difference between the maximum loss method and the highest relative capital method?

Both give the same total payment to each partner at the end. In the maximum loss method, you assume all unsold assets are lost at every instalment and calculate what each partner can safely receive. In the highest relative capital method, you rank partners by capital relative to profit share and pay the highest first until capitals match profit ratios.

Why is a deficiency shared in capital ratio and not profit ratio?

This follows the rule for an insolvent partner in Garner v Murray. The solvent partners bear the shortfall in the ratio of their capitals, not their profit-sharing ratio. Profit ratio is used only to share the maximum loss and actual losses on realisation.

What if a partner shows a deficiency but is solvent?

In the instalment working, he still receives nothing and the other partners are treated as bearing his deficiency for now. If he later brings in the amount, it is shared among the other partners in the same ratio. Read the question: if he brings cash in, add it to the cash available.

Where do partners' loans come in piecemeal distribution?

After outside liabilities, partners' loans are paid before any capital is returned. Only the cash left after the loans is treated as surplus for the capital working. Check whether the question includes the loan in the partner's balance.

Do I need to prepare ledger accounts for this topic?

The exam usually asks for a statement of distribution of cash. Prepare that statement carefully with clear working notes. Ledger accounts are needed only if the question asks for them.