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CA Foundation · Business Laws · The Indian Partnership Act, 1932

Kiran, Lata and Mohan are partners. After dissolution of the firm, the assets are insufficient to pay the firm's debts and the partners' capital. Which statement correctly reflects the order of applying the firm's assets and contributions under the Act on settlement of accounts?

Losses, including any deficiency of capital, are met first from profits, then from capital, and finally by the partners individually in their profit-sharing ratio. The Act sets this order, so equal sharing or capital-ratio sharing is not the rule.

  1. ALosses, including deficiency of capital, are paid first out of profits, then out of capital, and lastly by the partners individually in their profit-sharing ratioCorrect
  2. BLosses are paid first by the partners individually in equal shares, then out of capital
  3. CLosses are paid out of capital first, then profits, then by the partners in the ratio of their capitals
  4. DLosses are borne only by the partner who has the lowest capital

Explanation

The Act provides that 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 were entitled to share profits. The distractors reverse this order or change the ratio to equal shares or capital ratio, which the Act does not provide.

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