On what basis is the amount remaining after paying external liabilities and partners’ loans distributed among the partners?

Correct answer: In proportion to the balances due in the partners’ capital accounts

At dissolution, external liabilities are paid first, followed by partners’ loans. Any surplus remaining is then used to settle the amounts due to partners according to the balances in their capital accounts. Sales, purchases and salaries are not the basis for this distribution. Exam tip: remember the order of settlement—external liabilities, partners’ loans and finally partners’ capital.