Dissolution explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a firm is dissolved, its assets are sold, its debts are paid and what is left goes to the partners. The books are closed through a realisation account, which collects the sale of assets and the payment of liabilities and shows the profit or loss on winding up. This guide gives the legal order in which money is applied, closes the books for one invented firm to nil, and then repeats the exercise with one partner insolvent. Our partnership deed drafting team writes a dissolution and settlement clause into the deed so that this order is agreed in advance.
Section 48 of the Indian Partnership Act, 1932 applies, subject to agreement, the firm's assets first to debts to outsiders, then to partners' advances (loans), then to partners' capital, with any residue shared in the profit-sharing ratio. Losses, including deficiencies of capital, are met first from profits, then from capital, and last by the partners individually in the profit-sharing proportion. The realisation account records the sale and the loss or profit; partners' accounts and the bank account then close to nil.
The law, by link
Our post on section 48 sets out the rule and the post on the five ways a firm is dissolved and the order of settling accounts covers the legal side. Section 48, as printed, says the rules apply "subject to agreement by the partners". Its clause (a) says losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits. Clause (b) says the assets, including sums the partners contribute to make up deficiencies of capital, are applied (i) in paying the debts of the firm to third parties, (ii) in paying each partner rateably what is due to him for advances as distinguished from capital, (iii) in paying each partner rateably what is due on account of capital, and (iv) the residue, if any, is divided among the partners in the proportions in which they were entitled to share profits. Section 49 adds that the firm's property is applied first to the firm's debts and a partner's separate property first to his separate debts.
How the books are closed
| Step | Entry |
|---|---|
| 1. Transfer assets (except cash and bank) to the realisation account at book value | Realisation A/c Dr; To each asset |
| 2. Transfer outside liabilities to the realisation account | Each liability Dr; To Realisation A/c |
| 3. Record sale proceeds | Bank A/c Dr; To Realisation A/c |
| 4. Record payment of liabilities and realisation expenses | Realisation A/c Dr; To Bank A/c |
| 5. Transfer reserves to partners' accounts | In the profit-sharing ratio |
| 6. Transfer the profit or loss on realisation to partners' accounts | In the profit-sharing ratio |
| 7. Pay partners' loans, then capital | Section 48(b) order |
Where a partner's loan is separate from capital, it is not transferred to the realisation account; it is paid after outsiders.
Worked example: Menon, Naidu and Oberoi
The entity and all figures in this example are invented for illustration.
Menon, Naidu and Oberoi share profits 2:2:1 and keep fixed capitals. The firm is dissolved. Its balance sheet on the date is:
| Capital and liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Capital: Menon | 3,00,000 | Building | 3,00,000 |
| Capital: Naidu | 2,00,000 | Machinery | 2,00,000 |
| Capital: Oberoi | 1,00,000 | Stock | 1,60,000 |
| General reserve | 60,000 | Debtors | 1,40,000 |
| Current account: Menon (credit) | 40,000 | Cash and bank | 60,000 |
| Current account: Naidu (credit) | 30,000 | Current account: Oberoi (debit) | 70,000 |
| Naidu's loan | 50,000 | ||
| Creditors | 1,50,000 | ||
| Total | 9,30,000 | Total | 9,30,000 |
The assets other than cash and bank, 3,00,000 + 2,00,000 + 1,60,000 + 1,40,000 = 8,00,000, go to the realisation account. Creditors are paid 1,45,000 in full settlement and realisation expenses are 15,000.
Part 1: all partners solvent
Assets realise: building 3,40,000; machinery 1,60,000; stock 1,30,000; debtors 1,25,000. Total 7,55,000.
Realisation account
| Particulars | Debit | Particulars | Credit |
|---|---|---|---|
| To Building | 3,00,000 | By Creditors (transferred) | 1,50,000 |
| To Machinery | 2,00,000 | By Bank: building | 3,40,000 |
| To Stock | 1,60,000 | By Bank: machinery | 1,60,000 |
| To Debtors | 1,40,000 | By Bank: stock | 1,30,000 |
| To Bank: creditors paid | 1,45,000 | By Bank: debtors | 1,25,000 |
| To Bank: expenses | 15,000 | By Loss: Menon | 22,000 |
| By Loss: Naidu | 22,000 | ||
| By Loss: Oberoi | 11,000 | ||
| Total | 9,60,000 | Total | 9,60,000 |
Working: debit 8,00,000 + 1,45,000 + 15,000 = 9,60,000; credit 1,50,000 + 7,55,000 = 9,05,000; loss 9,60,000 - 9,05,000 = 55,000, shared 2:2:1 as 22,000, 22,000 and 11,000.
Partners' accounts (capital, current account, reserve and loss together)
| Particulars | Menon | Naidu | Oberoi |
|---|---|---|---|
| Capital | 3,00,000 | 2,00,000 | 1,00,000 |
| Current account | 40,000 | 30,000 | (70,000) |
| General reserve (2:2:1) | 24,000 | 24,000 | 12,000 |
| Loss on realisation | (22,000) | (22,000) | (11,000) |
| Due to the partner | 3,42,000 | 2,32,000 | 31,000 |
Bank account
| Particulars | Debit | Particulars | Credit |
|---|---|---|---|
| To Balance b/d | 60,000 | By Creditors paid | 1,45,000 |
| To Realisation (assets sold) | 7,55,000 | By Realisation expenses | 15,000 |
| By Naidu's loan | 50,000 | ||
| By Menon | 3,42,000 | ||
| By Naidu | 2,32,000 | ||
| By Oberoi | 31,000 | ||
| Total | 8,15,000 | Total | 8,15,000 |
Check: bank receipts 60,000 + 7,55,000 = 8,15,000; payments 1,45,000 + 15,000 + 50,000 + 3,42,000 + 2,32,000 + 31,000 = 8,15,000. The amounts due to partners, 3,42,000 + 2,32,000 + 31,000 = 6,05,000, equal the cash left after outsiders and the loan: 8,15,000 - 1,45,000 - 15,000 - 50,000 = 6,05,000. Every partner's account and the loan account close to nil.
Part 2: Oberoi insolvent
The same firm, but the assets realise only 5,35,000 (building 2,50,000; machinery 1,10,000; stock 90,000; debtors 85,000), and Oberoi is insolvent and can pay nothing.
Realisation account: debit 8,00,000 + 1,45,000 + 15,000 = 9,60,000; credit 1,50,000 + 5,35,000 = 6,85,000; loss 2,75,000, shared 2:2:1 as 1,10,000, 1,10,000 and 55,000.
| Particulars | Menon | Naidu | Oberoi |
|---|---|---|---|
| Capital | 3,00,000 | 2,00,000 | 1,00,000 |
| Current account | 40,000 | 30,000 | (70,000) |
| General reserve (2:2:1) | 24,000 | 24,000 | 12,000 |
| Loss on realisation | (1,10,000) | (1,10,000) | (55,000) |
| Balance before deficiency | 2,54,000 | 1,44,000 | (13,000) |
| Deficiency of Oberoi borne by Menon and Naidu in the ratio of capitals 3:2 | (7,800) | (5,200) | 13,000 |
| Paid | 2,46,200 | 1,38,800 | nil |
The deficiency. Oberoi's account is in debit by 13,000 and he cannot pay it. The deficiency is borne by the solvent partners. The rule taught in Garner v Murray, which applies where the deed is silent, is that solvent partners bear it in the ratio of their capitals and not in the profit-sharing ratio; where capitals are fixed, the fixed capitals are used. Menon and Naidu's fixed capitals are 3,00,000 and 2,00,000, a ratio of 3:2. A deed may provide another method, and if the deficiency were shared in the profit ratio instead, each of Menon and Naidu would bear 6,500.
Bank account
| Particulars | Debit | Particulars | Credit |
|---|---|---|---|
| To Balance b/d | 60,000 | By Creditors paid | 1,45,000 |
| To Realisation (assets sold) | 5,35,000 | By Realisation expenses | 15,000 |
| By Naidu's loan | 50,000 | ||
| By Menon | 2,46,200 | ||
| By Naidu | 1,38,800 | ||
| Total | 5,95,000 | Total | 5,95,000 |
Check: cash left after outsiders and the loan: 5,95,000 - 1,45,000 - 15,000 - 50,000 = 3,85,000, which is 2,46,200 + 1,38,800. Before the deficiency the claims were 2,54,000 + 1,44,000 = 3,98,000, which is 13,000 more than the cash, equal to Oberoi's debit balance. 7,800 + 5,200 = 13,000. All accounts close to nil.
Other points
Where assets are realised in stages, the partners can be paid in instalments as cash comes in; the deed may fix the rule, and this article does not work those methods. A limited liability partnership is wound up under its own Act and not under these rules.
Common mistakes
- Transferring a partner's loan to the realisation account: it is paid after outsiders, and before capital.
- Sharing the realisation loss in the capital ratio: it is shared in the profit-sharing ratio.
- Forgetting the reserve and the current accounts when finding what is due to each partner.
- Sharing an insolvent partner's deficiency in the profit ratio without checking the deed.
- Paying partners before outsiders and loans, against section 48.
Need help with dissolving a firm?
If you are closing a partnership and need the realisation accounts, settlement figures and a dissolution deed, we can prepare all of them. Our partnership deed drafting service covers the dissolution deed, the settlement statement and the closure of accounts.
Key takeaways
- Section 48 order: outsiders, partners' loans, partners' capital, residue in the profit ratio, subject to agreement.
- The realisation account holds the sale of assets and payment of liabilities and shows the profit or loss.
- Reserves and the realisation result go to partners in the profit-sharing ratio.
- An insolvent partner's deficiency is borne by the solvent partners as the rule taught or the deed provides.
- All accounts close to nil.
Read next
- Partnership dissolution: five ways and the order of settling accounts
- Partnership accounts: capital, interest and appropriation
- Death of a partner: accounting
- Section 48: settlement of accounts between partners
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.