Accounting treatment of Insolvency of partners - Garner V/S Murray - Deep Study

When a partner's capital account shows debit balance , it means that partner is insolvent . In other words he is unable to pay his loan . This is extra loss which must be tolerated by other partners . Why ? Because the whole liabilities of partnership firm is unlimited . Now one question is arised that in which proportion or ratio , the rest partners divide this extra loss or deficiency of firm . Before the decision of Garner V/s Murray case , this extra loss deems as normal loss and it is distributed rest partners in their profit and loss sharing ratio

Decision in Garner V/S Murray Case :-

In this case , the judges decided that in the absence of any anti- agreement , insolvent partner's deficiency will be distribute in capital ratio in rest partners after bringing cash equal to their loss on the realisation .

Result of above decision :-

1) Solvent partner will bring his loss from realisation in cash form.

2) Insolvent partner's capital account's deficiency will distribute in solvent partners in their capital ratio

See Also

Explanation the scheme of Gradual realisation of assets and Piecemeal distribution