Section 48 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.
Section 48 sets the default method of settling accounts after dissolution: how losses are met, and the order in which the firm's assets are paid out. These rules apply "subject to agreement by the partners", so a deed can change them. If you need the accounts of a dissolved firm settled, our legal consultation service can help.
After dissolution, and subject to agreement by the partners, 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 shared profits (48(a)). The firm's assets, including sums partners contribute to make up capital deficiencies, are applied in this order: (i) debts to third parties; (ii) each partner's advances, rateably; (iii) each partner's capital, rateably; (iv) the residue, divided in the profit-sharing proportions (48(b)).
Section 48(a): how losses are met
Losses, including deficiencies of capital, are to be paid:
| Order | Source |
|---|---|
| First | Out of profits |
| Next | Out of capital |
| Lastly, if necessary | By the partners individually, in the proportion in which they were entitled to share profits |
Three phrases deserve attention.
- "Deficiencies of capital" are treated as losses. The text does not define them; read plainly, it refers to the shortfall where capital has been eroded.
- "In the proportion in which they were entitled to share profits": the individual contribution follows the profit-sharing ratio, not the capital ratio.
- "If necessary": partners are called on personally only after profits and capital are exhausted.
Example. A firm of Arun and Bela, sharing profits 3:2, closes with accumulated profits of Rs 1 lakh and capital of Rs 5 lakh. Losses on closure come to Rs 7 lakh. First the Rs 1 lakh of profits is used, then the Rs 5 lakh of capital, leaving Rs 1 lakh. That Rs 1 lakh is to be paid by the partners individually in the profit-sharing proportion, Rs 60,000 by Arun and Rs 40,000 by Bela.
Section 48(b): the order of applying assets
The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, are applied in this manner and order:
| Step | Application |
|---|---|
| (i) | In paying the debts of the firm to third parties |
| (ii) | In paying to each partner rateably what is due to him from the firm for advances as distinguished from capital |
| (iii) | In paying to each partner rateably what is due to him on account of capital |
| (iv) | The residue, if any, divided among the partners in the proportions in which they were entitled to share profits |
Step by step
- Outside creditors first. Third-party debts come before any claim of a partner.
- Partners' advances. The text separates advances (loans made by a partner to the firm) from capital. Advances are repaid before capital. "Rateably" means in proportion where the funds fall short.
- Partners' capital. Repaid rateably after advances.
- Residue. Anything left is divided in the profit-sharing ratio.
Example. On dissolution, the firm's assets realise Rs 20 lakh. It owes Rs 8 lakh to suppliers. Partner Chetan had lent it Rs 2 lakh as an advance. The partners' capital is Rs 6 lakh each (Rs 12 lakh in all). Order: Rs 8 lakh to suppliers; Rs 2 lakh to Chetan on his advance; the remaining Rs 10 lakh goes to capital, which stands at Rs 12 lakh, so each partner receives capital rateably. Nothing is left for the residue. A partner whose "loan" is documented as an advance ranks ahead of capital, which is why the label matters in the books.
"Subject to agreement by the partners"
The introduction to section 48 says its rules shall, subject to agreement by the partners, be observed. So:
- the partners may agree a different order, a different loss-sharing ratio, or a different way of dealing with capital deficiencies;
- if there is no agreement, the rules in 48(a) and (b) apply.
The Act does not say what form the agreement must take. A clause in the deed or a separate dissolution agreement would be the usual place.
How section 48 fits with the neighbours
- Before accounts are settled, section 46 gives each partner the right to have the firm's property applied to debts; see sections 46 and 47.
- Where the firm's debts and a partner's private debts compete for the same property, section 49 supplies the order; see sections 49 and 50.
- Goodwill is treated as an asset in settling accounts under section 55; see section 55.
The source copy does not carry a "Short Note" under section 48.
What can the deed change?
Almost everything in section 48, because it applies "subject to agreement by the partners". The deed can alter the order of payment, the loss-sharing ratio and the treatment of capital deficiencies. It cannot be assumed to change the position of outside creditors, which is a matter between the firm and third parties and is not addressed by section 48's internal rules.
Practical points
- Label partner loans carefully. Whether a sum is an advance or capital changes its place in the queue.
- Record the profit-sharing ratio in the deed. It decides how losses and the residue are shared.
- Prepare a closing balance sheet and share it with all partners.
- For how a deed fixes these matters, see partnership deed key clauses and for settlement in practice settlement of accounts after dissolution.
Need help settling the accounts?
Settlement needs a clear closing balance sheet, a record of advances and capital, and agreement on losses. Our legal consultation team can help you apply section 48 to your numbers, or document a different agreement among the partners. A short review of your deed and last accounts is usually enough to start.
Key takeaways
- Section 48's rules apply after dissolution, subject to agreement by the partners.
- Losses and capital deficiencies are met first from profits, then capital, then by partners individually in the profit-sharing ratio (48(a)).
- Assets are applied to third-party debts, then partners' advances, then partners' capital, then the residue in the profit-sharing ratio (48(b)).
- Advances rank before capital.
Read next
- Sections 46 and 47: winding up and continuing authority of partners
- Sections 49 and 50: firm debts, separate debts and profits after dissolution
- Settlement of accounts after dissolution
- Partnership dissolution: the five ways and the order of settling accounts
Disclaimer: Based on the text of the Indian Partnership Act, 1932 as consulted on 1 October 2026. Several States have amended the registration chapter and make their own rules, forms and fees for the Registrar of Firms. This article is general information, not legal advice; check the official text and your State's rules before acting.