What happens to partnership liabilities when a partnership is dissolved?

When a partnership is dissolved, the treatment of its liabilities is governed by established legal principles. Specifically, option A points out that liabilities are settled in the order established by law, which is correct.

Upon dissolution, the partnership must take steps to settle its outstanding debts before distributing any remaining assets to the partners. This process typically follows a specific hierarchy: first, creditors must be paid off, including securing any debts as necessary. After creditors are satisfied, any remaining assets can then be divided among the partners based on their ownership interests or partnership agreement.

This order reflects the principle that a partnership’s debts must be cleared before profit distribution, ensuring that creditors are paid what they are owed.

The other options misrepresent the rules around partnership liabilities. Equal liability for all partners is not a blanket rule, as liability can vary based on specific circumstances and the partnership agreement. The idea that liabilities are cancelled automatically upon dissolution is incorrect, as liabilities still exist and must be dealt with. Lastly, the presence of profits does not absolve the partnership of its debts; instead, profits may be used to satisfy those liabilities. Thus, the correct understanding is that liabilities are settled according to legal protocols before any asset distribution can happen.