In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. What is the correct order of distribution of assets during the settlement process?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Pay off outside liabilities, repay partner's loans, settle capital account balances, and distribute surplus among partners.
During the dissolution of a firm, the assets, including any contributions made by the partners to address capital deficiencies, are allocated according to the following sequence:
(i) Settling the firm's debts to third parties.
(ii) Repaying each partner their due amount for advances separate from capital (partner's loan).
(iii) Distributing to each partner their proportional share based on capital contributions.
(iv) Dividing any remaining residue, if applicable, among the partners based on their profit-sharing ratio.