Answer Posted / siddharth
When a partner’s capital account shows a debit balance on
dissolution of the firm, he has to pay the debit balance to
the firm to settle his account. If the partner becomes
insolvent, he is unable to pay back the amount owed by him
to the firm in full. The amount not paid is a loss to the
firm which under the Garner vs Murray Rule is to be borne
by the solvent partners.
According to Garner vs Murray Rule:
The loss on account of insolvency of a partner is a CAPITAL
loss which should be borne by the solvent partners in the
ratio of their capitals standing in the balance sheet on
the date of dissolution of the firm.
Notes:
“Capital” in this case relates to the real capital of the
partners and not capital as may be standing in the books of
partnership firm in the names of different partners. This
distinction is especially critical when the partners are
maintaining their capital accounts on fluctuation capital
system. The true capitals according to this rule will be
ascertained after making all adjustments regarding
reserves, drawings, unrecorded assets on the date of the
balance sheet on the date of dissolution of the partnership
firm. When the capitals are FIXED, no such adjustment is
required.
Where a partner is solvent but has a debit balance in
his/her capital account, just before the dissolution of the
partnership firm, such a partner will not be required to
bear the loss on account of insolvency of a partner.
The rules dictates that:-
The solvent partners should bring in cash equivalent to
their respective share of loss on realization and
The loss due to the insolvency of a partner should be then
be divided among the solvent partners in the ratio of
capitals standing after the partners have brought in cash
equal to their share of loss on realization.
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