On dissolution of a firm, the assets are realized (disposed) and the liabilities are paid off. Balance if any is shared among the partners. According to the Partnership Act the following rules can be followed for the settlement of accounts.
1. Loss is to be paid first out of profits, next out of capital and last out of the private assets of partners in their ratio.
2. Amount realized from the assets of the firm shall be used in the following order
- Paying the realisation expenses
- Paying the liabilities to outsiders
- Paying the loans from partners
- Paying the capital of the partners
- Surplus if any is to be distributed to partners