Accountancy Part ADissolution of Partnership Firm

In case of dissolution of a partnership firm, losses, including defic…

In case of dissolution of a partnership firm, losses, including deficiencies of capital, shall be paid first out of.......

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Profits

Section 48 of the Partnership Act, 1932 fixes the order in which losses on dissolution are met: first out of profits, next out of the partners’ capital, and lastly by the partners individually in their profit sharing ratio. Borrowings are a liability to be paid, not a source for meeting losses.

NCERT (2026-27 edition):
Settlement of Accounts – “… (a) Treatment of Losses Losses, including deficiencies of capital, shall be paid : (i) first out of profits, (ii) next out of capital of partners, and (iii) lastly, if necessary, by the partners individually in their profit sharing ratio.”