Question

The amount realised from assets along with contribution from partners, if required, shall be utilised first to pay off the outside ________ of the firm.

• A. Expenses
• B. Loans
• C. Liabilities
• D. Debts

Answer 1

The correct option is C Liabilities

In case of dissolution of firm, the firm ceases to conduct business and has to settle its accounts. For this purpose it disposes all its assets for satisfying all the claims against it. Subject to agreement among the partners, rules as provided in Section 48 of the Partnership Act 1932 should be applied.

(a) Application of assets: The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:

(i) In paying the debts of the firm to the third parties;

(ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner's loan);

(iii) In paying to each partner proportionately what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in their profit sharing ratio

Thus, the amount realised from assets along with contributions from partners, if required, shall be utilised first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables , etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans and advances made by the partners to the firm; and surplus, if any is to be utilised in settlement of the capital account balances, after adjusting all profits and losses.