Question

In the event of dissolution of a partnership firm, the order of payment of losses including deficiencies of capital shall be:

• A. (i) First out of profits, (ii) Next by the partners individually in their profit sharing ratio, (iii) Lastly, if necessary, out of capital of partners.
• B. (i) First out of capital of partners, (ii) Next out of profits, (iii) Lastly, if necessary, by the partners individually in their profit sharing ratio.
• C. (i) First by the partners individually in their profit sharing ratio, (ii) Next out of profits, (iii) Lastly, if necessary, out of capital of partners.
• D. (i) First out of profits, (ii) Next out of capital of partners, (iii) Lastly, if necessary, by the partners individually in their profit sharing ratio.

Hint:

Always adjust losses during dissolution first from profits, then capital, and finally in the agreed ratio if needed.

Answer 1

The Correct Option is D

According to the rules of settlement in case of dissolution as per the Garner vs. Murray rule (and general partnership law):
1. First, all losses including capital deficiencies are adjusted against any available profits.
2. Second, if profits are not sufficient, the capital of the solvent partners is utilized.
3. Third, if still required, losses are to be borne by the partners individually in their profit sharing ratio.

This order ensures equitable adjustment based on resources and prior entitlements.
Hence, the correct order is:
(i) First out of profits
(ii) Next out of capital of partners
(iii) Lastly, if necessary, by the partners individually in their profit sharing ratio