Accounts Settlement: All You need to know

Meaning of Settlement Account:

Settlement account is an account that is used in Balance of Payment (BOP) accounting to keep track of central banks’ reserve asset dealings with one other. The official settlement A/c keeps track of transactions that involve foreign exchange reserves, bank deposits, special drawing rights (SDRs) and gold.

For this purpose, it disposes of all its assets for fulfilling all the claims that are against it. It should be noted that, subject to agreement among the partners, the following rules as furnished in Section 48 of the Partnership Act 1932 shall be applicable.

• Treatment of Losses: Losses that include lack of capital, will be paid :
  • First out of gains
  • Next out of the capital of partners
  • Lastly, if required, by the partners independently in their profit sharing ratio (PSR)

• Application of Assets: The assets of the enterprise, that includes any sum that is contributed by the partners to make up insufficiency of capital, will be applied in the following order :
  • In paying debts of the enterprise to the third parties
  • In paying each partner commensurately what is due to him or her from the enterprise for advances as differentiated from the capital (i.e. partner’ loan)
  • In paying to each partner commensurately what is due to him on a/c of capital
  • The balance, if any, will be allocated among the partners in their profit sharing ratio (PSR)

Hence, the amount received from assets with contributions from partners, if needed, shall be utilised to pay the outside liabilities of the enterprise such as loans, bank overdraft, creditors, bill payables, etc., (it may be noted that secured loans have more pre-eminence over the unsecured loans); the balance should be pertained to repay advances and loans made by the partners to the enterprise.

The above mentioned is the concept that is explained in detail about the Settlement of Accounts for the Class 12 Commerce students. To know more, stay tuned to BYJU’S.