All partners wish to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons.
Yastin is correct. According to the rules for settlement of accounts on dissolution of a firm, partner's loan must be paid before the payment of capitals to partners.
The amount realised from assets is first utilised to pay off outside liabilities such as creditors, loans, bank overdraft, etc. After settling outside liabilities, the balance amount is applied to repay loans made by partners to the firm. Only after paying partner's loans, the remaining amount is utilised for settlement of capital account balances.
Therefore, Yastin's loan of Rs. 2,00,000 shall be paid before the payment of capitals to partners. Amart's claim that capitals should be paid before Yastin's loan is incorrect as it goes against the prescribed order of payment under Section 48 of the Partnership Act, 1932.
Explanation
The textbook clearly states the order of payment on dissolution: (1) outside liabilities first, (2) partner's loans next, and (3) capital account balances last. Yastin's loan being a partner's loan takes precedence over capital repayment, making her claim valid.
Solution Steps
Step 1: Identify the nature of Yastin's claim - it is a partner's loan to the firm
Step 2: Apply the rules of settlement order - outside liabilities → partner's loans → capital balances
Step 3: Conclude that partner's loan (Yastin's Rs. 2,00,000) must be paid before capitals