Mode of settlement of accounts Section 48
In settling the accounts of the firm after dissolution, the following rules shall, subject to agreement by partners be observed –
a) Losses, including deficiencies of capital, shall paid first out of the profits, next out of capital and lastly if necessary by partners individually in the proportion in which they were entitled to share profits. Thus, losses are to be shared equally the deficiency in capital is also to be treated like an ordinary loss and partners are to bear that loss in the same proportion in which they were sharing profits and losses. In Nowell and Nowell, A and B had contributed unequal amounts £1929 and £29 respectively toward the capital. They have agreed to share profits and losses equally. A deficiency of £500 in capital having arisen, it was held that same was to shared equally between A and B.
If one or more partners become insolvent and they are not able to contribute their share of loss, the solvent partners are not bound to contribute for share of insolvent partners. (Garner v. Murray)
b) The assets of the firm or amount available is to utilised by the firm for making payment in following order –
i) In paying the debts of the firm to third parties.
ii) If some partner has given advance over and above the capital, then the amount is to be utilised in making payment to each one of them rateably.
iii) Making payment to each partner rateably what is due to him on account of capital.
iv) The residue of any is deemed to be profit and same is to be divided among the partners in the proportion in which they were entitled to share profits.