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CA Foundation · Accounting · Partnership and LLP Accounts

On dissolution of a partnership firm, in which order must the amounts realised from assets (including any amounts contributed by partners) be applied, as per the Indian Partnership Act, 1932?

Realisation proceeds are first used to pay outside creditors, then partners' loans or advances, then partners' capital. Any remaining balance is shared among the partners in their profit-sharing ratio. This sequence protects outsiders first and treats partners' loans as liabilities ranking ahead of their capital.

  1. APartners' capital, then outside liabilities, then partners' loans
  2. BOutside liabilities, then partners' loans, then partners' capital, and any balance as profit/surplus among partners in the profit-sharing ratioCorrect
  3. CPartners' loans, then outside liabilities, then partners' capital
  4. DPartners' capital, then partners' loans, then outside liabilities

Explanation

Losses, including deficiency of capital, are met first out of profits, then capital, then partners in their profit-sharing ratio. Assets are applied first to debts owed to third parties, then to partners' advances/loans, then to capital contributions, with any residue shared as per profit ratio. Paying loans after capital reverses the statutory order and is wrong.

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