AccountancyCBSE Class 12 · Dissolution of Partnership Firm

Settlement of Accounts on Dissolution: Section 48, Capital and Bank Accounts (Class 12)

Updated 15 October 2026 · Fact-checked

On dissolution, Section 48 of the Indian Partnership Act fixes the order of settlement: losses are met from profits, then capital, then by partners personally; the money realised is used to pay outside debts first, then partners' loans, then partners' capitals, with any residue shared in the profit sharing ratio. Capital and bank accounts must close together.

Understand Settlement of Accounts on Dissolution

Dissolution of partnership vs dissolution of firm.

Dissolution of partnership: the relationship among partners changes (admission, retirement, death, change in ratio), but the firm continues; books are not closed.
Dissolution of the firm: the relationship among all partners ends and the business closes; assets are sold, liabilities paid and the books closed. Every dissolution of the firm dissolves the partnership, but not the other way round.

Modes of dissolving a firm (Indian Partnership Act, 1932). By agreement of all partners; compulsory (all or all but one partner insolvent, or the business becomes illegal); on happening of certain contingencies (expiry of term, completion of the venture, death or insolvency of a partner, unless agreed otherwise); by notice (partnership at will); and by the court (for example, a partner of unsound mind, permanent incapacity, misconduct, persistent breach of agreement, transfer of interest, or the business can only run at a loss).

Section 48: mode of settlement.

(a) Losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if needed, by partners individually in their profit sharing ratio.
(b) Assets of the firm, including sums contributed by partners to make up deficiencies, are applied in this order:

1. debts of the firm to third parties;
2. advances (loans) by partners, rateably;
3. partners' capitals, rateably;
4. the residue, if any, among partners in the profit sharing ratio.

Accounts to prepare after realisation.

Partners' Capital Accounts: opening balances, current account balances (if capitals are fixed), reserves and accumulated profits (Cr), accumulated losses (Dr), realisation profit (Cr) or loss (Dr), assets taken over (Dr), liabilities taken over or expenses paid (Cr), and the final cash paid or brought in.
Bank Account: opening balance, cash from realisation, cash brought in by partners with debit balances (Dr); payments to creditors, expenses, partners' loans and final capital balances (Cr).

The final tally. After outside liabilities and partners' loans are paid, the bank balance (plus any cash brought in) must exactly equal the total of the partners' final credit balances. A partner whose capital shows a debit balance must bring in cash: Bank A/c Dr; To Partner's Capital A/c.

Settlement of Accounts on Dissolution: key facts

Section 48(b) order: 1.Outside debts
2.partners' loans
3.partners' capitals
4.residue in PSR; Loans and capitals paid rateably.
Section 48(a) losses: 1.Profits
2.capital
3.partners individually in PSR
Final capital balance: Capital + reserves ± realisation result − assets taken + liabilities/expenses borne; Debit balance means the partner brings cash.
Tally: Bank after paying liabilities and loans + cash brought in = Σ final credit balances

How to answer Settlement of Accounts on Dissolution questions

A 6-mark dissolution question wants three accounts. Prepare them in this order and use the final tally as your answer check.

1Prepare the Realisation Account and find the profit or loss.
2Open partners' capital accounts with opening balances; bring in current accounts, reserves and accumulated profits or losses.
3Post the realisation result, assets taken over and liabilities or expenses borne by partners.
4Prepare the Bank Account: receipts first, then payments in the Section 48 order.
5Balance capitals; a debit balance means cash brought in.
6Pay the final balances; Bank and capital accounts should both close at nil.

Settlement of Accounts on Dissolution in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

A partner with a debit balance must bring cash

Suppose Meena and Nisha close their boutique and share profits equally. After all reserves and adjustments, Meena's capital is ₹90,000 and Nisha's ₹10,000. Selling the stock and fittings and paying suppliers results in a realisation loss of ₹40,000, and the bank has ₹60,000 left.

What happens to each partner's account, and how is Meena paid in full?

Try it first, then show the solutionSolution

Each bears 20,000 of the loss: Meena 90,000 − 20,000 = 70,000 (Cr); Nisha 10,000 − 20,000 = −10,000 (Dr).
Nisha must bring in ₹10,000: Bank A/c Dr 10,000 To Nisha's Capital A/c 10,000.
Bank becomes 60,000 + 10,000 = 70,000, which pays Meena.

Answer: Nisha brings ₹10,000 because her share of the loss exceeds her capital; the bank then holds ₹70,000, exactly Meena's balance, and both accounts close at nil.

Memory hook: A debit balance on dissolution is a bill the partner must pay into the firm.

Tricks to remember Settlement of Accounts on Dissolution

Short memory aids. Say each one aloud once, then use it on a question the same day.

Outsiders, Loans, Capitals, Residue (OLCR)
'Others Look, Colleagues Rest': outside debts, loans of partners, capitals, residue.
Use it when: Section 48 order.
Profit, Capital, Pocket
Losses come out of profits first, then capital, then the partners' own pockets.
Use it when: Section 48(a).
Close together
Bank and capitals must both reach nil at the same time.
Use it when: Checking the solution.

Settlement of Accounts on Dissolution: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Order of payment · 1 mark · MCQBoard level

On dissolution, after paying realisation expenses, the cash of the firm is applied first to pay:
(a) partners' capitals
(b) partners' loans
(c) debts to third parties
(d) the residue in the profit sharing ratio

Try it first, then show the solutionSolution

Section 48(b): third-party debts come first, then partners' loans, then capitals.

Answer: (c) debts to third parties

Example 2: Cash available for capitals · 3 marks · Short answerBoard level

On dissolution, the firm's bank balance was ₹20,000. Assets realised ₹1,80,000. Creditors were paid ₹60,000, a partner's loan ₹30,000 and realisation expenses ₹5,000. How much cash is available to pay partners' capitals? (3 marks)

Try it first, then show the solutionSolution

Receipts: 20,000 + 1,80,000 = 2,00,000.
Payments in order: creditors 60,000, expenses 5,000, partner's loan 30,000 = 95,000.
Available = 2,00,000 − 95,000 = ₹1,05,000.

Answer: ₹1,05,000 is available for partners' capitals.

Example 3: Final capital balances · 4 marks · Short answerHarder board level

A and B share profits 3 : 2 with capitals of ₹80,000 and ₹40,000 and a General Reserve of ₹20,000. On dissolution, the realisation loss is ₹50,000, and A took over an asset at ₹10,000. Calculate the final amounts payable to A and B and the bank balance needed. (4 marks)

Try it first, then show the solutionSolution

Reserve: A 12,000, B 8,000. Loss: A 30,000, B 20,000.
A = 80,000 + 12,000 − 30,000 − 10,000 = ₹52,000.
B = 40,000 + 8,000 − 20,000 = ₹28,000.
Bank needed = ₹80,000.

Answer: A ₹52,000, B ₹28,000; the bank must hold ₹80,000 after paying liabilities.

Example 4: Debit balance after the loss · 4 marks · Short answerHarder board level

X and Y share profits equally with capitals of ₹1,20,000 and ₹30,000. All liabilities have been paid, and the realisation loss is ₹1,00,000. Prepare the final settlement entries. (4 marks)

Try it first, then show the solutionSolution

Loss ₹50,000 each: X 70,000 Cr; Y 30,000 − 50,000 = 20,000 Dr.
Bank before contributions = 1,50,000 − 1,00,000 = 50,000.
Y brings cash: Bank A/c Dr 20,000 To Y's Capital A/c 20,000; bank becomes 70,000.
X's Capital A/c Dr 70,000 To Bank A/c 70,000.

Answer: Y brings in ₹20,000 and X is paid ₹70,000; both accounts close.

Example 5: Realisation, capitals and bank together · 6 marks · Long answerHOTS / competency

P, Q and R share profits 2 : 2 : 1. Balance sheet: Bank 15,000; Debtors 45,000; Stock 35,000; Furniture 25,000; Plant 1,00,000 | Creditors 40,000; Q's Loan 20,000; General Reserve 10,000; Capitals P 70,000, Q 50,000, R 30,000. On dissolution: debtors realised ₹42,000; R took the stock at ₹30,000; furniture realised ₹20,000; plant ₹85,000; creditors were paid ₹39,000; expenses ₹3,000 were paid by the firm. Find the realisation result, final capital balances and the bank balance, and show the settlement. (6 marks)

Try it first, then show the solutionSolution

Realisation: Dr assets 2,05,000 + creditors 39,000 + expenses 3,000 = 2,47,000; Cr creditors 40,000 + bank 1,47,000 + R 30,000 = 2,17,000; loss ₹30,000 (P 12,000, Q 12,000, R 6,000).
Bank: 15,000 + 1,47,000 − 39,000 − 3,000 − Q's loan 20,000 = ₹1,00,000.
Capitals: P 70,000 + 4,000 − 12,000 = 62,000; Q 50,000 + 4,000 − 12,000 = 42,000; R 30,000 + 2,000 − 6,000 − 30,000 = 4,000 Dr.
R brings ₹4,000: bank = 1,04,000.
Pay P 62,000 and Q 42,000 = 1,04,000; bank closes.

Answer: Loss on realisation ₹30,000. R brings in ₹4,000; P is paid ₹62,000 and Q ₹42,000, closing the bank account at nil.

Example 6: Partnership versus firm · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): Dissolution of a partnership always results in the dissolution of the firm.
Reason (R): On dissolution of a partnership, the business may continue under a reconstituted partnership.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Admission or retirement dissolves the old partnership, but the firm continues; so A is false and R is true.

Answer: (d) A is false, but R is true.

Where students lose marks in Settlement of Accounts on Dissolution

The slips examiners see most often, and what to write instead.

Mistake: Paying partners' loans before creditors
Not following Section 48.
Wrong working
Bank Cr: Q's loan 20,000, then creditors 39,000.
Right working
Creditors first, then Q's loan.
Do this: Write payments in the OLCR order.
Usually costs: 1 mark.
Mistake: Leaving a partner's capital with a debit balance
Not noticing the sign.
Wrong working
R's Capital closed by 'To Bank 4,000' on the credit side.
Right working
R brings cash: By Bank 4,000 on the credit side of R's capital; Bank Dr.
Do this: If debits exceed credits, the partner brings cash.
Usually costs: 1-2 marks.
Mistake: Forgetting the asset taken over in the capital account
Recording it only in Realisation.
Wrong working
R's Capital without the 30,000 debit for stock.
Right working
R's Capital Dr 30,000 (stock taken over).
Do this: Every realisation entry with a partner has a matching capital entry.
Usually costs: 1 mark, and the tally fails.
Mistake: Ignoring current accounts when capitals are fixed
Closing only capital accounts.
Wrong working
Current account balances left open.
Right working
Transfer current balances to capital accounts first.
Do this: One account per partner at the end.
Usually costs: 1 mark.

Exam tips

Prepare capital accounts in columnar form; it saves time and shows the tally clearly.
Write the Bank Account payments in the Section 48 order with labels.
Show the closing check in one line: 'Bank 1,04,000 = P 62,000 + Q 42,000'.
Settlement questions are 4- or 6-mark items; Section 48 and modes of dissolution are 1- or 3-mark theory.

Practice questions on Settlement of Accounts on Dissolution

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A partnership at will is dissolved when a partner gives written notice to the others of his intention to dissolve it. This is dissolution:
(a) by agreement
(b) by notice
(c) compulsory
(d) by the court
Hint
Partnership at will.
Answer
(b) by notice
Q2 · 1 mark · MCQBoard level
Which is paid first out of the amount realised on dissolution?
(a) Partner's loan
(b) Creditors
(c) Partners' capitals
(d) General reserve
Hint
Third parties first.
Answer
(b) Creditors
Q3 · 1 mark · Very short answerBoard level
After paying all liabilities, the bank shows ₹90,000. Final capital balances are X ₹55,000 and Y ₹35,000. Pass the entry for the final payment. (1 mark)
Hint
Both credit balances.
Answer
X's Capital A/c Dr 55,000; Y's Capital A/c Dr 35,000; To Bank A/c 90,000.
Q4 · 3 marks · Short answerHarder board level
State the order in which the assets of a firm are applied on dissolution under Section 48 of the Indian Partnership Act, 1932. (3 marks)
Hint
Four steps.
Answer
(i) Debts of the firm to third parties; (ii) advances (loans) made by partners, rateably; (iii) capitals of partners, rateably; (iv) the residue, if any, among partners in their profit sharing ratio.
Q5 · 4 marks · Short answerHarder board level
A, B and C share profits 2 : 2 : 1. After all adjustments except the realisation loss, their capitals are A ₹40,000, B ₹30,000 and C ₹5,000. The realisation loss is ₹50,000, and all liabilities are paid. Show the final settlement. (4 marks)
Hint
C's share of the loss is 10,000.
Answer
Loss: A 20,000, B 20,000, C 10,000. Balances: A 20,000 Cr, B 10,000 Cr, C 5,000 Dr. Bank = 75,000 − 50,000 = 25,000; C brings 5,000 (bank 30,000); A is paid 20,000 and B 10,000.
Q6 · 3 marks · Short answerHarder board level
Give three differences between dissolution of partnership and dissolution of a firm. (3 marks)
Hint
Business, books, court.
Answer
(i) Business: continues on dissolution of partnership; closes on dissolution of the firm. (ii) Books: not closed on dissolution of partnership; closed on dissolution of the firm. (iii) Assets and liabilities: revalued on dissolution of partnership; realised and paid on dissolution of the firm. (Also: the court can order dissolution of the firm, not merely of the partnership.)
Q7 · 3 marks · Short answerHarder board level
A and B have fixed capitals of ₹50,000 each. A's current account has a credit balance of ₹8,000 and B's a debit balance of ₹6,000. On dissolution, the realisation profit is ₹10,000 (shared equally). Calculate the final amounts payable. (3 marks)
Hint
Transfer current balances first.
Answer
A = 50,000 + 8,000 + 5,000 = ₹63,000; B = 50,000 − 6,000 + 5,000 = ₹49,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): On dissolution, a partner's loan is repaid before outside creditors.
Reason (R): Under Section 48, debts to third parties are paid first.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Who comes first?
Answer
(d) A is false, but R is true.
Q9 · 3 marks · Short answerHOTS / competency
A and B share profits equally. Their capitals were ₹60,000 and ₹40,000, and the General Reserve was ₹10,000. On dissolution, A received ₹45,000 and B ₹25,000 in final settlement; no partner took over any asset or liability. Calculate the realisation loss. (3 marks)
Hint
Work back from A's account.
Answer
A: 60,000 + 5,000 − L/2 = 45,000, so L/2 = 20,000 and L = ₹40,000. Check B: 40,000 + 5,000 − 20,000 = 25,000.
Q10 · 3 marks · Short answerHOTS / competency
Suppose a firm deals in a product that a new law makes illegal to sell. The partners want to continue by changing their profit sharing ratio. Can they? Explain the mode of dissolution involved. (3 marks)
Hint
Compulsory dissolution.
Answer
No. When the business becomes illegal, the firm is compulsorily dissolved under the Indian Partnership Act, 1932, whatever the partners wish. Changing the ratio would only reconstitute the partnership, which cannot carry on an unlawful business; the firm must be wound up and its accounts settled.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Under Section 48, what is paid immediately after third-party debts?Show answer
Partners' loans (advances), rateably.
2.What does a debit balance in a partner's capital account on dissolution mean?Show answer
He must bring in cash to settle it.
3.Name any three modes of dissolution of a firm.Show answer
By agreement, compulsory, on contingencies, by notice, by the court (any three).
4.Does the firm continue on dissolution of partnership?Show answer
Yes; only the relationship changes.
5.What two accounts must close together at the end?Show answer
Bank Account and partners' capital accounts.

Settlement of Accounts on Dissolution: frequently asked questions

What is the order of settlement under Section 48?

Losses are met from profits, then capital, then by partners individually; assets are applied to outside debts, then partners' loans, then capitals, and any residue is shared in the profit sharing ratio.

What if a partner's capital account shows a debit balance on dissolution?

He brings in cash: Bank A/c Dr To his Capital A/c. Insolvency of a partner, where he cannot pay, is outside the 2026-27 syllabus.

Is dissolution of partnership the same as dissolution of the firm?

No. Dissolution of partnership changes the relationship but the firm continues; dissolution of the firm closes the business and the books.

How do I know my dissolution answer is right?

The bank balance after paying liabilities and partners' loans, plus any cash brought in, must equal the total of partners' final credit balances.