AccountsISC Class 12 · Dissolution of a Partnership Firm

Settlement of Accounts under Section 48: ISC Class 12 Accounts

Updated 15 October 2026 · Fact-checked

Section 48 of the Indian Partnership Act, 1932 governs settlement on dissolution of a firm. Losses, including deficiencies of capital, are met from profits, then capital, then by partners in their profit ratio. Assets and partners' contributions go first to outside debts, then partners' loans, then capitals, and any surplus is shared in the profit ratio.

Under Section 48(b), pay in this order: outside debts, partners' loans, capitals, and only then share any surplus in the profit ratio.

Illustration drawn for QuestionBuddy.

Understand Settlement of Accounts under Section 48

Dissolution of partnership or of the firm? Dissolution of *partnership* changes the relationship among partners (admission, retirement, death) while the firm continues; a Revaluation Account is prepared. Dissolution of the *firm* ends the business altogether; assets are realised, liabilities paid and a Realisation Account is prepared. ISC examiners in 2024 noted candidates mixing the two.

Section 48(a): losses. Losses, including deficiencies of capital, are paid:
1. first out of profits;
2. next out of capital;
3. lastly, if necessary, by the partners individually in their profit-sharing ratio.
In accounting terms, a realisation loss and accumulated losses are debited to capitals in the profit ratio; a partner whose capital turns debit brings in cash.

Section 48(b): order of applying the firm's assets (including sums contributed by partners to make up deficiencies):
1. debts of the firm to third parties;
2. advances (loans) by partners, rateably;
3. capital of each partner, rateably;
4. the residue, if any, among partners in their profit-sharing ratio.

CISCE rules that apply the order.

A loan from a partner is paid through the Bank A/c, even if his capital account has a debit balance. It is not set off.
A loan given by the firm to a partner is debited to his capital account.
With fixed capitals, current account balances are first transferred to capital accounts.

Memorandum Balance Sheet. The syllabus lists it among the statements prepared on dissolution: it is the Balance Sheet on the date of dissolution, from which items are sorted into Realisation, Bank and capital accounts.

What is out of scope. Piecemeal distribution, insolvency of a partner, amalgamation and conversion into a company are excluded from the ISC syllabus, so ISC questions assume all realisations happen together.

Settlement of Accounts under Section 48: key facts

Section 48(a): who bears losses: Profits
then Capital
then Partners individually in profit-sharing ratio; Includes deficiencies of capital.
Section 48(b): order of payment: Outside debts
Partners' loans (rateably)
Partners' capitals (rateably)
Surplus in profit ratio
Cash available for capitals: Cash after realisation − Outside liabilities paid − Expenses − Partners' loans; Equals total capitals after all adjustments.
Partner with a debit capital: Cash brought in = Debit balance after realisation loss and adjustments; His loan is still paid separately through Bank (CISCE).
Check: Opening bank + Receipts + Cash brought in − Payments = 0; The Bank A/c must close at nil.

How to answer Settlement of Accounts under Section 48 questions

Section 48 appears as a 1-mark order question and as the logic behind every Bank Account on dissolution. Apply it in sequence.

1Confirm it is dissolution of the firm, not reconstitution.
2Close current accounts into capitals if capitals are fixed; credit reserves and debit accumulated losses.
3Find the realisation result and share it in the profit ratio.
4In the Bank A/c, pay outside liabilities first, then partners' loans.
5Collect cash from any partner with a debit capital.
6Pay the final capital balances; the Bank A/c should close at nil.

Settlement of Accounts under Section 48 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.

Order of paying on winding up

Suppose four classmates run a T-shirt stall for a school fair and agree to share equally. After the fair they have ₹9,000. They owe the printer ₹4,000, one classmate lent the stall ₹1,000, and each put in ₹750 as capital.

In what order should they pay, and what does each classmate get from the surplus?

Try it first, then show the solutionSolution

Pay the printer ₹4,000 (outside debt), then the classmate's loan ₹1,000.
Return capital ₹3,000 (₹750 each).
Surplus = 9,000 − 4,000 − 1,000 − 3,000 = ₹1,000, shared equally.

Answer: Printer, then loan, then capital; each classmate gets ₹250 of surplus besides his ₹750.

Memory hook: Outsiders, lenders, owners, then the leftovers.

Tricks to remember Settlement of Accounts under Section 48

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

D-L-C-S
Debts, Loans, Capital, Surplus: the order under Section 48(b).
Use it when: Order-of-payment MCQs.
P-C-P for losses
Profits, Capital, Partners personally: the order under Section 48(a).
Use it when: Questions on meeting losses.
Firm ends: Realisation; firm continues: Revaluation
If the business survives, revalue; if it closes, realise.
Use it when: Telling the two dissolutions apart.

Settlement of Accounts under Section 48: solved examples

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

Example 1: After outside debts · 1 mark · MCQBoard level

Under Section 48(b) of the Indian Partnership Act, 1932, after paying the firm's debts to third parties, the assets are next applied to pay:
(a) partners' capitals
(b) loans and advances made by partners
(c) the surplus in the profit ratio
(d) realisation expenses borne by partners

Try it first, then show the solutionSolution

Order: third-party debts, partners' advances, capitals, residue.
Advances come second.

Answer: (b) loans and advances made by partners

Example 2: Applying the order · 3 marks · Short answerBoard level

On dissolution, Meera and Naveen (3:2) have ₹3,20,000 in the bank after all assets are realised. Creditors are ₹85,000 and Meera's loan to the firm ₹25,000. Their capitals are Meera ₹1,20,000 and Naveen ₹80,000, with no other adjustments. Show how the cash is applied and each partner's final receipt. (3 marks)

Try it first, then show the solutionSolution

Creditors ₹85,000, then Meera's loan ₹25,000: remaining ₹2,10,000.
Capitals ₹2,00,000; surplus ₹10,000 shared 3:2: ₹6,000 and ₹4,000.
Meera receives 1,20,000 + 6,000 = ₹1,26,000 (plus her loan ₹25,000); Naveen ₹84,000.

Answer: Creditors ₹85,000; Meera's loan ₹25,000; Meera ₹1,26,000; Naveen ₹84,000.

Example 3: Loss creating a deficiency of capital · 3 marks · Short answerHarder board level

Oscar and Pia share profits 1:2. Their capitals are Oscar ₹40,000 and Pia ₹15,000. On dissolution there is a realisation loss of ₹45,000. Apply Section 48(a) and state what each partner must do. (3 marks)

Try it first, then show the solutionSolution

Loss shared 1:2: Oscar ₹15,000; Pia ₹30,000.
Oscar: 40,000 − 15,000 = ₹25,000 credit.
Pia: 15,000 − 30,000 = ₹15,000 debit: the deficiency she must make good personally.

Answer: Pia brings in ₹15,000; Oscar is then paid ₹25,000.

Example 4: From Balance Sheet to final payments · 6 marks · Long answerHarder board level

Quinn and Rohan share equally. Balance Sheet on dissolution: Capitals Quinn ₹90,000, Rohan ₹60,000; General Reserve ₹20,000; Creditors ₹45,000; Rohan's Loan ₹30,000 | Bank ₹15,000; Debtors ₹50,000; Stock ₹70,000; Furniture ₹1,10,000. Debtors realised ₹46,000, stock ₹63,000, furniture ₹98,000; creditors were paid ₹44,000; expenses ₹2,000. Find the realisation result and show the Section 48 order of payment with amounts. (6 marks)

Try it first, then show the solutionSolution

Realisation: Dr 2,30,000 + 44,000 + 2,000 = 2,76,000; Cr 45,000 + 2,07,000 = 2,52,000; loss ₹24,000, ₹12,000 each.
Bank: 15,000 + 2,07,000 = 2,22,000. Pay creditors 44,000 and expenses 2,000, then Rohan's loan 30,000: ₹1,46,000 left.
Capitals: Quinn 90,000 + 10,000 − 12,000 = ₹88,000; Rohan 60,000 + 10,000 − 12,000 = ₹58,000; total ₹1,46,000.
Final payments close the Bank A/c at nil.

Answer: Loss ₹24,000. Order: creditors ₹44,000 (and expenses ₹2,000), Rohan's loan ₹30,000, then Quinn ₹88,000 and Rohan ₹58,000.

Example 5: Debit capital and a partner's loan · 6 marks · Long answerHOTS / competency

Sia and Tej share 2:1. Capitals: Sia ₹56,000, Tej ₹9,000; Tej has lent the firm ₹18,000. The realisation loss is ₹42,000. After paying outside creditors, the firm has ₹41,000. Show the settlement under the CISCE rules. (6 marks)

Try it first, then show the solutionSolution

Loss: Sia ₹28,000; Tej ₹14,000.
Sia: 56,000 − 28,000 = ₹28,000 Cr. Tej: 9,000 − 14,000 = ₹5,000 Dr.
Tej's loan is paid in full through Bank, ₹18,000, not set off against his debit (CISCE rule; loans rank before capital).
Tej brings ₹5,000. Bank: 41,000 − 18,000 + 5,000 − 28,000 = nil.

Answer: Tej is paid ₹18,000 for his loan and brings in ₹5,000; Sia is paid ₹28,000.

Example 6: Which dissolution? · 3 marks · Short answerHOTS / competency

A firm has three partners. Case (i): one retires and the other two carry on the business. Case (ii): all three agree to close the business. For each case, state whether it is dissolution of partnership or of the firm and name the account prepared for asset values. (3 marks)

Try it first, then show the solutionSolution

Case (i): the business continues; only the agreement changes: dissolution of partnership; Revaluation Account.
Case (ii): the business ends: dissolution of the firm; Realisation Account and settlement under Section 48.

Answer: (i) Dissolution of partnership: Revaluation A/c. (ii) Dissolution of the firm: Realisation A/c.

Where students lose marks in Settlement of Accounts under Section 48

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

Mistake: Confusing the two dissolutions
Thinking any change of partners is dissolution of the firm.
Wrong working
Retirement: Realisation A/c
Right working
Retirement: Revaluation A/c
Do this: Ask: does the business continue? ISC examiners in 2024 noted this confusion.
Usually costs: 1 mark.
Mistake: Setting off a partner's loan against his debit capital
Netting to save a step.
Wrong working
Tej's Loan 18,000 transferred to Tej's Capital
Right working
Bank Cr 18,000 (loan paid); Tej brings 5,000
Do this: The CISCE syllabus requires the loan to pass through Bank.
Usually costs: 1-2 marks.
Mistake: Paying capitals before partners' loans
Not following Section 48(b).
Wrong working
Bank: To capitals, then To Loan
Right working
Loan paid before capitals
Do this: Debts, loans, capital, surplus.
Usually costs: 1 mark.
Mistake: Crediting an accumulated loss
Mixing up reserves and losses.
Wrong working
By P&L (Dr balance) in capitals
Right working
To P&L (Dr balance) in capitals
Do this: Losses reduce capital; ISC examiners in 2024 noted accumulated loss being credited.
Usually costs: 1 mark.

Exam tips

Quote 'Section 48' in the order-of-payment answers; it shows the legal basis.
Prepare the Bank A/c in the Section 48 order: creditors, loans, then capitals.
Show a partner's debit balance on the debit side of his capital account, not the credit side.
Check that the Bank A/c closes at nil.

Practice questions on Settlement of Accounts under Section 48

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
Under Section 48(a), losses including deficiencies of capital are met first out of:
(a) capital
(b) profits
(c) partners' private assets
(d) partners' loans
Hint
P-C-P.
Answer
(b) profits
Q2 · 1 mark · MCQBoard level
On dissolution, a partner's loan to the firm is repaid:
(a) before outside creditors
(b) after outside creditors but before capitals
(c) after capitals
(d) only out of surplus
Hint
D-L-C-S.
Answer
(b) after outside creditors but before capitals
Q3 · 3 marks · Short answerBoard level
After realising all assets a firm has ₹1,75,000. Creditors are ₹40,000, bills payable ₹15,000 and a partner's loan ₹20,000. How much is available for capitals? (3 marks)
Hint
Deduct in Section 48 order.
Answer
1,75,000 − 40,000 − 15,000 − 20,000 = ₹1,00,000.
Q4 · 3 marks · Short answerHarder board level
Capitals ₹75,000 and ₹35,000; ratio 3:2; realisation loss ₹60,000. Find the capital balances after the loss. (3 marks)
Hint
Loss 36,000 and 24,000.
Answer
₹39,000 and ₹11,000 (both credit).
Q5 · 3 marks · Short answerHarder board level
Capitals ₹25,000 and ₹12,000; partners share equally; realisation loss ₹40,000. What does each partner receive or pay? (3 marks)
Hint
₹20,000 each.
Answer
First partner receives ₹5,000; second brings in ₹8,000.
Q6 · 1 mark · Assertion-reasonHarder board level
Assertion (A): On dissolution, partners' loans are paid before their capitals.
Reason (R): Section 48(b) places advances by partners ahead of capital in the order of payment.
(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
Legal basis.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q7 · 6 marks · Long answerHarder board level
Xavier and Yamini share equally. After realisation the bank has ₹2,40,000. Creditors ₹60,000 and Xavier's loan ₹30,000 are to be paid. Capitals are Xavier ₹80,000 and Yamini ₹50,000, and a General Reserve of ₹16,000 is undistributed. Find the realisation result and the final payments to partners. (6 marks)
Hint
Cash left for capitals minus capitals and reserve.
Answer
Left after creditors and loan: ₹1,50,000; capitals + reserve ₹1,46,000; realisation profit ₹4,000 (₹2,000 each). Xavier ₹90,000; Yamini ₹60,000.
Q8 · 3 marks · Short answerHarder board level
Arrange in the Section 48(b) order: partners' capitals; partner's loan; bank loan; surplus. (3 marks)
Hint
A bank loan is a third-party debt.
Answer
Bank loan → partner's loan → partners' capitals → surplus.
Q9 · 6 marks · Long answerHOTS / competency
After all adjustments, Uma's capital is ₹30,000 (Cr) and Ved's ₹6,000 (Dr). Ved has a loan of ₹15,000 to the firm. The bank has ₹39,000 after paying creditors. Show the order of the remaining Bank entries. (6 marks)
Hint
Loan first; do not set off.
Answer
Pay Ved's loan ₹15,000 (balance 24,000); Ved brings ₹6,000 (30,000); pay Uma ₹30,000; bank nil.
Q10 · 3 marks · Short answerHOTS / competency
After paying creditors and partners' loans, a firm has ₹1,08,000. Capitals after reserves total ₹1,20,000. Partners share 3:1. Find the realisation result and each share. (3 marks)
Hint
The gap is the realisation result.
Answer
Realisation loss ₹12,000: ₹9,000 and ₹3,000.

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.Order of payment under Section 48(b)?Show answer
Outside debts, partners' loans, capitals, surplus.
2.Who makes good a deficiency of capital?Show answer
The partners individually, in the profit-sharing ratio.
3.Is piecemeal distribution in the ISC syllabus?Show answer
No, it is excluded.
4.Loan to a partner on dissolution goes to?Show answer
His capital account (debit).
5.Which account is prepared on dissolution of partnership (firm continues)?Show answer
Revaluation Account.

Settlement of Accounts under Section 48: frequently asked questions

What does 'rateably' mean in Section 48?

In proportion to the amounts due. Partners' loans are repaid in proportion to each loan; capitals in proportion to each capital.

Is insolvency of a partner tested in ISC?

No. Insolvency, piecemeal distribution, amalgamation and conversion to a company are excluded from the syllabus.

Why is a partner's loan paid even if his capital is in debit?

Section 48 ranks loans ahead of capital, and the CISCE syllabus states the loan passes through the Bank A/c; the partner then brings cash for his debit.

What is a Memorandum Balance Sheet on dissolution?

The firm's Balance Sheet on the date of dissolution, used as the starting point for the Realisation, capital and Bank accounts.