Accountancy Part ADissolution of Partnership Firm

Loss on the event of dissolution of a firm including deficiencies of…

Loss on the event of dissolution of a firm including deficiencies of capital shall be paid from which source first?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Profits

Section 48 of the Partnership Act fixes the order in which losses on dissolution, including deficiencies of capital, are met: first out of profits, next out of the partners’ capital, and lastly by the partners individually in their profit sharing ratio.

Option (1) Bank Borrowings — Incorrect. Borrowings are outside liabilities to be paid off, not a source for meeting losses.

Option (3) Partner's Capital A/c — Incorrect. Capital is used only after the profits are exhausted.

Option (4) By partners individually in their profit sharing ratio — Incorrect. Partners pay from their own pockets only as the last resort.

NCERT (2026-27 edition):
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.”