X, Y and Z are partners sharing profits in equal ratio. Capital balances of 1st April, 2023 are X ₹ 50,000, Y ₹ 40,000, Z ₹ 30,000. Their private assets are : X ₹ 20,000, Y ₹ 2,000 and Z ₹ 5,000. What is the extent of their liability in the firm?

Question

Accepted Answer

The correct option is 3:
The correct answer is X ₹ 70,000, Y ₹ 42,000, Z ₹ 35,000 because a fundamental characteristic of a general partnership firm is the principle of **Unlimited Liability**. This concept dictates that not only is a partner liable to the extent of the capital they have invested in the firm, but their personal or private assets can also be attached and utilised to repay the firm’s debts if the firm's assets are insufficient at the time of dissolution. Therefore, the **extent of a partner's total liability** to outside creditors, should the worst happen, is the sum of their existing capital balance in the firm and their available private assets. For partner X, this total liability is Capital (₹ 50,000) + Private Assets (₹ 20,000) = ₹ 70,000. Following the same logic, Y's total liability is ₹ 40,000 + ₹ 2,000 = ₹ 42,000, and Z's total liability is ₹ 30,000 + ₹ 5,000 = ₹ 35,000. This combined figure represents the maximum amount each partner is ultimately responsible for to clear the firm’s obligations.

The incorrect option is 1:
Option 1 suggests the liability is only X ₹ 50,000, Y ₹ 40,000, Z ₹ 30,000. This figure represents only the current Capital Balances of the partners. This is incorrect because it fails to account for the crucial legal feature of a partnership: unlimited liability. If the firm is wound up and owes more money than its assets (including capital) can cover, the partners are personally liable for the remaining deficit. Their liability is not limited to the capital amount stated in the firm's balance sheet.

The incorrect option is 2:
Option 2 suggests the liability is only X ₹ 20,000, Y ₹ 2,000, Z ₹ 5,000. These figures represent only the Private Assets of the respective partners. This is incorrect as the primary source of settling firm debts is the firm's resources, which include the capital contributed by the partners. If the firm faces a deficit, the partners’ full capital balances are first applied to clear the debts. Only if more is required are the private assets called upon. Thus, the total exposure is the sum of both the capital and the private assets.

The incorrect option is 4:
The option "None of these" is incorrect. As demonstrated by the calculation based on the unlimited liability principle, the correct total liability for each partner is the sum of their Capital and Private Assets, which precisely matches the amounts given in Option 3. Therefore, a correct option is provided in the choices.