Question

State the following statement is true:

Partner’s loans have to be paid before any payment is made to any of the partners as capital.

Answer 1

This statement is true.

Explanation:

When a partnership firm is dissolved, partner’s loans (i.e., loans given by partners to the firm) must be paid off first before any distribution of capital is made to the partners. This is because, legally, loans from partners are treated as external liabilities, and they have priority over the return of capital. Once the firm has settled its liabilities, including loans from partners, any remaining funds can then be used to settle the capital balances of the partners. This order ensures that the firm's debt obligations are honored before returning capital.