Question

When all the partners are insolvent, the loss shown by Realisation Account is debited to capital accounts of partners in the ________________.

• A. Capital ratio
• B. Profit sharing ratio
• C. Equal ratio
• D. Ratio laid down in ruling of Garner v. Murray

Answer 1

The correct option is B Profit sharing ratio

If all the partners are insolvent, then the creditors cannot be paid in full. All the cash available, together with whatever can be recovered from the private estates of the partners, will be paid to the creditors after the expenses of realisation are met.

The Realisation Account should be prepared in the usual course but creditors should not be transferred to this account nor will payment to creditors be debited to this account; the loss on realisation should be transferred to the capital accounts of partners in the profit-sharing ratio.