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CMA Intermediate · Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

On dissolution of a firm, the assets of the firm, including sums contributed by partners to make up capital deficiencies, are applied under Section 48 of the Indian Partnership Act, 1932 in a stated order. Which sequence is correct?

Outside debts are paid first. Partners' advances (loans, as distinct from capital) are paid rateably next, then partners' capital rateably. Any residue is shared in the profit-sharing ratio. This is the order prescribed by Section 48(b) of the Indian Partnership Act, 1932, subject to agreement between the partners.

  1. ADebts to third parties; then each partner's capital; then partners' advances; then the residue by profit-sharing ratio
  2. BDebts to third parties; then partners' advances rateably; then partners' capital rateably; then the residue by profit-sharing ratioCorrect
  3. CPartners' advances; then debts to third parties; then partners' capital; then the residue by profit-sharing ratio
  4. DDebts to third parties; then partners' advances and capital together, rateably; then the residue by capital ratio

Explanation

Section 48(b) lays down four steps: (i) debts to third parties, (ii) each partner's advances (as distinguished from capital) rateably, (iii) each partner's capital rateably, (iv) any residue in the profit-sharing ratio. Placing capital before advances, or mixing the two, reverses or blurs this order.

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