The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.
1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:
a) First of all the external liabilities and expenses are to be paid.
b) Then, all loans and advances forwarded by the partners should be paid.
c) Then, the capital of each partner should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.
2. Treatment of Loss: In case of loss and any deficiency of capital this should be paid in the following order:
a) First these should be adjusted against firm's profits.
b) Then, against the total capital of the firm.
c)Even if there exists any loss and deficiencies then it should be borne by all the partners individually in their profit sharing ratio.