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

Which of the following best reflects the rule on losses, including deficiencies of capital, when a firm's accounts are settled after dissolution, subject to agreement among partners?

Losses, including deficiencies of capital, are met first from profits, then from capital, and finally, if necessary, by the partners individually in their profit-sharing ratio. This is the default rule in Section 48, applying only where the partners have no agreement to the contrary.

  1. ALosses are paid first out of capital, then profits, then by partners individually
  2. BLosses are paid first out of profits, next out of capital, and lastly by partners individually in their profit-sharing proportionsCorrect
  3. CLosses are borne only by the partner with the highest capital
  4. DLosses are paid by partners individually in the ratio of their capitals before using profits

Explanation

Section 48(a) 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 proportions in which they were entitled to share profits. The order in the first option is reversed, and the capital ratio is not the basis.

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