Realisation, a partner's loan and an insolvent partner
Anila, Balu and Cyriac shared profits 2:2:1 and dissolved the firm on 31 March 2025. The balance sheet showed cash ₹10,000; debtors ₹80,000; stock ₹60,000; furniture ₹40,000; machinery ₹1,50,000; creditors ₹90,000; bills payable ₹20,000; Anila's loan ₹30,000; capitals Anila ₹1,10,000, Balu ₹85,000 and Cyriac ₹5,000. There were no reserves. Realisation: debtors ₹70,000; stock taken over by Balu at ₹55,000; furniture ₹30,000; machinery ₹1,05,000; an unrecorded typewriter sold for ₹10,000. Creditors were paid ₹90,000 and bills payable ₹20,000. Realisation expenses ₹5,000 were paid by the firm. Cyriac is insolvent and can pay nothing; his deficiency is to be borne by the solvent partners. Anila claims her ₹30,000 loan must be paid before creditors because she is a partner. Balu wants the stock he took over to be recorded at its book value of ₹60,000.
1. Prepare the Realisation Account and partners' capital accounts.
Read the worked answer
Realisation Account
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Debtors | 80,000 | By Bank - debtors | 70,000 |
| To Stock | 60,000 | By Balu’s Capital - stock | 55,000 |
| To Furniture | 40,000 | By Bank - furniture | 30,000 |
| To Machinery | 1,50,000 | By Bank - machinery | 1,05,000 |
| To Bank - expenses | 5,000 | By Bank - typewriter | 10,000 |
| To Bank - creditors | 90,000 | By Creditors | 90,000 |
| To Bank - bills payable | 20,000 | By Bills Payable | 20,000 |
| Total | 4,45,000 | Total | 3,80,000 |
Loss on realisation = ₹4,45,000 − ₹3,80,000 = ₹65,000, shared 2:2:1: Anila ₹26,000; Balu ₹26,000; Cyriac ₹13,000.
Capital Accounts
| Particulars | Anila | Balu | Cyriac |
|---|---|---|---|
| Opening capital | 1,10,000 | 85,000 | 5,000 |
| Less: Realisation loss | (26,000) | (26,000) | (13,000) |
| Balance before deficiency | 84,000 | 59,000 | (8,000) |
| Less: Cyriac’s deficiency shared 1:1 | (4,000) | (4,000) | 8,000 |
| Final balance | 80,000 | 55,000 | Nil |
Balu’s ₹55,000 is settled by the stock he took over; Anila receives ₹80,000 in cash. Cash: opening ₹10,000 + realisations ₹2,15,000 − creditors ₹90,000 − bills ₹20,000 − Anila’s loan ₹30,000 − expenses ₹5,000 = ₹80,000.
2. Evaluate Anila's claim and state the order of payment.
Read the worked answer
Anila’s claim is incorrect. Her ₹30,000 is a partner’s loan, not a trade liability. The order on dissolution is:
- External liabilities - creditors and bills payable - are paid first.
- Then a partner’s loan is paid; it ranks before the partners’ capitals but after outside creditors.
- Finally, the partners’ capitals are returned.
The loan is not transferred to the Realisation Account because it is a liability to a partner, not an asset realisation or an external liability. It is paid separately. If cash were insufficient, Anila could not rank equally with creditors; her loan would be settled before capital, and any unpaid balance would be a claim against the firm/partners in accordance with the Partnership Act.
3. Explain the treatment of Balu's stock takeover and Cyriac's deficiency. Does Balu bear the whole stock loss?
Read the worked answer
Balu took the stock at an agreed price of ₹55,000. This is a sale of firm’s asset to a partner, so the entry is: Balu’s Capital A/c Dr ₹55,000; To Realisation A/c ₹55,000. His capital is reduced by the agreed takeover price, not by the book value.
The stock’s book value was ₹60,000, so the firm suffered a ₹5,000 fall on this asset. That ₹5,000 is not charged solely to Balu; it forms part of the overall realisation loss of ₹65,000, which is shared by Anila, Balu and Cyriac in 2:2:1. Balu therefore bears only his share of the total loss.
Cyriac’s capital deficiency is ₹8,000. Since he is insolvent and the deed is silent, the deficiency is borne by the solvent partners in their profit-sharing ratio, 2:2 (equal), not in their capital ratio: Anila ₹4,000 and Balu ₹4,000. This follows the rule that an insolvent partner’s deficiency is shared by solvent partners in the profit-sharing ratio unless the deed says otherwise.