Settlement of Accounts Class 12

Settlement of Accounts –

Dissolution of a partnership firm leads to cessation of business/ operating activities of the firm. This means that the business is no longer in existence and therefore the accounts need to be settled. The partnership firm disposes all its assets in order to meet its obligations.

The rules for settlement of accounts is provided in section 48 of the Partnership Act 1932, which shall be followed after dissolution of the firm.

1. How to treat the losses once the firm stands dissolved?

The losses or any other deficiencies of capital can be made good by paying them off the in following sequence –

a) Firstly, losses are settled with the profits available.

b) Once profits are exhausted, partner’s capital amount is used.

c) And if further any losses remain, they are settled in the profit sharing ratio of the partners individually.

2. How are assets of a firm used in case of settlement of accounts?

The assets of the firm and any contribution from the partners available at the time of dissolution shall be used in the below mentioned sequence in order to settle the accounts –

a) External party debts are paid off first. The external parties can be creditors, bank loans, bank overdrafts, bills payable etc. Wishing these third parties also, first preference is given to secured loans over unsecured loans.

b) Any loan provided by the partners is settled next on a proportionate basis.

c) After settlement of partner’s loan account, any amount payable to partners on account of capital is paid proportionately.

d) Once all the above liabilities are settled, any remaining surplus is distributed among the partners in their profit sharing ratio.

Private Debts and Firm’s Debts –

In situations where there is existence of both private debts of partners and firm’s debts, the settlement is made following the below given principles –

• Any assets or property of the firm should first be applied to settle firm’s debt and after that any residue is divided between the partners which can further be used by them to meet their private obligations. This basically implies that while applying firm’s assets for settlement first preference is given to firm’s own liabilities.
• Just like firm’s assets are used to first settle firm’s liabilities, similarly private assets of a partner are first applied to settle his/her private debts. The remaining amount is utilised to to meet firm’s liabilities. Private assets of a partner do not cover personal properties of their wife and children.

Thus, settlement of accounts of a partnership firm can be made either through the available profits or its assets. The Partnership Act provides an order in which the liabilities should be settled.

Chapter 5 Dissolution of Partnership Firm

1. Dissolution of Partnership
2. Dissolution of a Firm
3. Settlement of Accounts
4. Accounting Treatment