In case of dissolution of a partnership firm, losses, including deficiencies of capital, shall be paid first out of ...............
In case of dissolution of a partnership firm, losses, including deficiencies of capital, shall be paid first out of ...............
Solution
During dissolution of a partnership firm, the application of assets follows a specific sequence as per Section 48 of the Indian Partnership Act, 1932.
When losses occur (including deficiencies of capital), they must be paid in the following order:
First → Profits (accumulated profits or reserves of the firm)
Second → Capital accounts of partners
Third → Partners' individual contributions in their profit-sharing ratio (if profits and capital are insufficient)
The logic behind this sequence is that any accumulated profits or reserves belong to the firm and should be utilized before touching the partners' capital. Only when profits are insufficient should the capital be used, and only as a last resort should partners be required to bring in additional funds from their personal resources.
For example, if a firm has accumulated profits of ₹50,000 and faces a loss of ₹80,000 during dissolution:
- First ₹50,000 will be adjusted from profits
- Remaining ₹30,000 will be adjusted from partners' capital accounts
- If capital is still insufficient, partners will contribute individually in their profit-sharing ratio
Therefore, Option 2: Profits is the correct answer as losses are paid first out of profits before utilizing capital or seeking additional contributions from partners.
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