Dissolution of a Partnership Firm

Dissolution of a firm: As per Indian Partnership Act, 1932: “Dissolution firm

means termination of partnership among all the partners of the firm”

When a firm is dissolved, the business of the firm terminates. All the assets the
firm are disposed off and all outsiders’ liabilities and partners’ loan and partner
capital are paid.

Reconstitution may take place on:

· Change in profit sharing ratio among the existing partner:

· Admission of a partner; and

· Retirement or Death of partner.

It may or may not result into closing down of the business as the remaining
partners may decide to carry on the business under a new agreement.

Types of dissolution of firms: A Partnership firm can be dissolved in any the

following ways:

(A)Without the intervention of the court:

(1) When all partners agree to dissolve the firm (Sec. 40);

(2) Compulsory Dissolution (Sec. 41)

(i) When all or except one partner of the firm become insolvent

(ii) When business of the firm become unlawful.

(3) On the happening of any of the following events: (Sec. 42)

(i) On the insolvency of a partner.

(ii) On the fulfillment of the objective of the firm for which the firm was formed.
(iii) On the expiry of the (period) for which the firm was formed.

(4) By Notice (Sec. 43): When the duration of the partnership firm is a fixed and it
is at will of the partners. Any partner by giving notice other partners can dissolve
the firm.

(B) Dissolution by order of the court (Sec. 44) : A court on application by a

partner may order the dissolution of the firm under the following circumstances:

(1) When a partner has become of unsound mind.

(2) When a partner has become permanently incapable of performing his duties as
a partner.

(3) When a partner is found guilty of misconduct that may harm the partnership.

(4) When a partner consistently and deliberately commits breach of partnership

agreement.

(5) When a partner transfer whole of is interest in the business firm to a third
party, without the consent of existing partners.

(6) When the court is satisfied that the partnership firm cannot be carried on
except at a loss.

(7) When the court finds that the dissolution of firm is justified and equitable.

ACCOUNTING TREATMENT OF DISSOLUTION

On dissolution of a firm, the following accounts are opened to close the books of
the firm .

· Realisation Account;

· Partner’s Loan Account;

· Partner’s Capital Accounts; and

· Cash or Bank Account.

 Realisation Account:
- It is nominal account
- opened on the dissolution of a firm
- to ascertain the profit or loss on realisation (selling) of assets and
payment of outsiders liabilities.
- This account is closed by transferring the balance (i.e., profit or loss on
realization) to partner’s capital accounts.

PREPARATION OF REALISATION ACCOUNT

The following Journal Entries are passed:

A. For Closing Assets Accounts:

Realisation A/cDr.
To Sundry Assets A/c
(Being assets transferred to Realisation A/c)

Note :

1. Cash and Bank balance are not transferred to Realisation Account.

2. Assets (tangible and intangible) are transferred to Realisation Account on their

Gross Value

3. Fictitious Asset such as Debit balance of Profit and Loss Account or

Advertisement Suspense’s Account etc. are not transferred to Realisation Account.
These are directly debited to partners’ capital accounts in their old profit sharing
ratio by passing the following entry.

Partner’s capital A/c Dr.

To Profit and Loss A/c
To Advertisement Suspense A/c
(Being Balance of losses transferred to capital accounts)

4. Provision against assets such as Provision for Depreciation or Provision for

Bad & Doubtful debts etc. are transferred to Realisation Account by passing a
Separate entry:
 Provision’s for Bad Debts A/c Dr.
Provision’s for Depreciation A/c Dr.
Investment Fluctuation Fund A/c Dr.
To Realisation A/c
(Being Provision & Reserves Against Assets transferred to Realisation Account)

B. For Closing External Liabilities Accounts:

Sundry Liabilities A/c Dr.
To Realisation A/c
(Being sundry liabilities transferred to Realisation A/c)

Note:

1. Only third parties or External liabilities/outsiders liabilities are transferred to

Realisation A/c.

2. Balance of Partner’s Loan Accounts are not transferred to Realisation Account

Separate accounts are opened to settle such liabilities.

3. Undistributed profits and reserves are also not transferred to Realisation A/c.
These are directly credited to partners’ capital accounts in their profit sharing ratio
by passing the following entry.

Profit and Loss A/c Dr.

General Reserves A/c Dr.
Reserve fund A/c Dr.
Contingency Reserve A/c Dr.
To Partner’s Capital A/cs
(Being balance of undistributed profits transferred to capital accounts)

4. Provident Fund is a liability on the firm towards employees and hence it is

transferred to Realisation A/c.

*5. If any liability is expected to arise against any found or reserve e.g.,
Workmen’s Compensation Fund, then an amount equal to such liability is
transferred to Realisation A/c balance, if any, distributed among the partners in
their profits-sharing ratio by passing the following entry.
 Workmen’s Compensation Fund A/c Dr.
To Realisation A/c (Liability)
To Partners’ Capital A/cs (Balance, if any)
(Being liability against workmen’s compensation fund transferred to Realisation
A/c and balance Distributed among partners in their old ratio)

C. For Realisation of Assets (Whether recorded or unrecorded)

a. When assets are sold for cash

Cash/Bank A/c Dr.

To Realisation A/c
(Being assets sold for cash)

b. When assets are taken over by any partner.

Partner’s Capital A/c Dr.

To Realisation A/c
(Being assets taken over by any partner)

c. When assets are taken over by any creditor in part or full payment of his dues:

I. In case of Full Settlement:

i. NO ENTRY is passed for the transfer of assets to the creditor.

ii. NO ENTRY is passed for the payment to creditor.

II. In case of Part Settlement:

i. NO ENTRY is passed for the transfer of assets to the creditor.

ii. The agreed amount of asset is deducted from the claims of the creditors and the
balance is paid to him.

Note :

The realized value of each asset must be given at the time of dissolution.
D. For Payment of Liabilities

a. When liabilities are paid in cash

Realisation A/c Dr.

To Cash/Bank A/c
(Being liabilities paid in cash)

b. When liabilities are taken over by any partner

Realisation A/c Dr.
To Partner’s Capital A/c
(Being liabilities taken over by a partner)

Note : If nothing is stated regarding the settlement of any outside liability,

then it should be assume that the amount equal to book value is paid.

E. For Realisation Expenses

a. When expenses are paid by firm and borne by firm:

Realisation A/c Dr.

To Cash/Bank A/c
(Being realization expenses paid in cash).

b. When expenses are paid by any partner and borne by firm :

Realisation A/c Dr.
To Partner’s Capital A/c
(Being realization expenses paid by a partner).

c. When expenses are paid by firm (on behalf of any partner) and borne by a
partner.
Partner’s Capital A/c Dr.
To Cash/Bank A/c
(Being realization expenses paid on behalf of partner).

d. When a partner is paid a fixed amount for bearing realization expenses then
Actual expenses are not be considered;
Realization A/c Dr. (With Fixed Amount)
 To Partner’s Capital A/c
(Being realization expenses paid by a partner)
e. When expenses are paid by one partner and borne by another partner;

Partner’s Capital A/c Dr. (Who was to borne the expenses)

To Partner’s Capital A/c (Who pays the expenses)
(Being realization expenses paid by one partner and borne by another partner).

In case the realization expenses are borne by a partner, clear indication should be
given regarding the payment there of.

F. For Closing Realisation Account

a. When Realization A/c Discloses profit (in case total of credit side is more than
the total of debit side)

Realisation A/cDr.
To Partner’s Capital A/cs
(Being profit on realization transferred to partners’ capital A/cs)

b. When Realisation A/c discloses loss (in case total of debit side is more than the
total of credit side)

Partners’ Capital A/cDr.

To Realisation A/c
(Being loss on realization transferred to partners capital A/cs)
 FORMAT OF
REALISATION A/C
PARTICULARS AMT PARTICULARS AMT
To Furniture xxx By Creditors Xxx
To P/M xxx By O/s Exp Xxx
To L/B xxx By B/P Xxx
To Stock xxx By EPF Xxx
To Patents xxx By PDD Xxx
To Debtors xxx By PFD Xxx
To Goodwill xxx By IFR* Xxx
To Investments xxx By WCC* Xxx
To B/R xxx By Cash/ Bank Xxx
- stock
- B/R
- P/M
(Realisation of
assets at an agreed
rate)
To Bank (Liab xxx By PCA( asset Xxx
Paid off) taken over by a
partner)
To Bank xxx By PCA ( Loss on Xxx
(Realisation Realisation)*
Expense)
To PCA ( liab. xxx
Paid by a partner)
To PCA ( Profit on xxx
realisation)*
XXX XXX
Q18. Realisation A/c
Particulars Amt Particulars Amt
Debtors 240000 Creditors 170000
Stock 130000 By Ramesh’s Cap 55000
Furn 200000 By Bank-Stock 50000
-Debtors 228000
- Mach 450000
Mach 930000 By Umesh’s Cap 50000
To Bank- Creditors 170000 By PCA 807000
- Unr. Bill 140000 R= 564900
U=242100
1003000 1003000

PCA
Particulars Ramesh Umesh Particulars Ramesh Umesh
To Bal -- 50000 By Bal 700000 300000
b/d(curr) b/d(cap)
To Real. 55000 50000 By Bal 80000 --
b/d(curr)
To Real 564900 242100 By WCR 147000 63000
Loss
To Bank 447100 80900 By GR 140000 60000
Xx xx Xx xx

Bank A/c
Particulars Amt Particulars Amt
To Bal b/d 110000 By Real 310000
To Real 728000 By Ramesh’s Cap 447100
By Umesh’s Cap 80900
838000 838000
Q 24. Realisation A/c
Particulars Amt Particulars Amt
Stock 6000 Cred 38000
Debtors 19000 Mrs. A’s Loan 10000
Furn 4000 A’s Cap 8000
Plant 28000 Bank 53000
Investment 10000 Loss 6600
A’s Cap 10000
Bank 38600
115600 115600

PCA
Particulars A B Particulars A B
Realisation 3960 2640 Bal 10000 8000
Realisation 8000 -- Reserve 3000 2000
P/l 4500 3000 Realisation 10000 --
Bank 6540 4360
23000 10000 23000 10000

Bank A/c
Particulars Amt Particulars Amt
Bal b/d 11500 Real 38600
Realisation 53000 A 6540
B 4360
B’s loan 15000
64500 64500

Q31.
Date Particulars L.F. Amt. Amt.
Realisation A/c Dr. 157000
To Stock A/c 50000
 To Debtors A/c 50000
To L/B A/c 57000
Creditors A/c Dr. 40000
To Realisation A/c 40000

Realisation A/c Dr. 55000

To Bank A/c 55000
( Being a Contingent Liab. And
creditors Paid off)
Bank A/c Dr. 112000
To Realisation A/c 112000
(Being L/B realized Rs. 40000,
Stock Rs. 30000 & Debtors Rs.
42000)
Realisation A/c Dr. 1200
To Bank A/c 1200
( Being Realisation Exp.
Incurred)
A’s A/c Dr. 30600
B’s A/c Dr. 20400
C’s A/c Dr. 10200
To Realisation A/c 61200
WCR A/c Dr. 21000
To A’s 10500
To B’s 7000
To C’s 3500
A’s A/c Dr. 10500
B’s A/c Dr. 7000
C’s A/c Dr. 3500
To P/L A/c 15000
To Adv Susp. A/c 6000
A’s Loan A/c Dr. 10000
To Bank A/c 10000

P A B C P A B C
P/l & 10500 7000 3500 Bal b/d 60000 40000 10000
AS
Real 30600 20400 10200 WCR 10500 7000 3500
Bank 29400 19600 -- Bank -- -- 200

Bank A/c
Part Amt Part Amt
To Bal 3000 Real 55000
To Real 112000 Real 1200
C 200 A 29400
B 19600
A’s Loan 10000
115200 115200

Q36.
Realisation A/c
Part Amt Part Amt
To Stock 7500 PDD 3000
Investment 15000 TC 45000
Debts 30000 B/P 12000
Bldg 22500 Mrs. A’s Loan 7500
Plant 30000 Mrs. B’s Loan 15000
Goodwill 6000 IFR 1500
A’s Cap 6000
To A: 23522 B’s Cap 6750
B:23523 47045
Bank: Bank:
TC-44925 Debts-28500
B/P- 11980 Plant- 37500
Mrs. B’s Loan- Bldg- 60000
15000 73405 Goodwill- 9000
Invt- 6750 141750
B’s Cap 450
238950 238950
Memorandum Balance Sheet

Q42.
MBS
Liab Amt Assets Amt
A 7000 Sundry Assets 21250
B 4000
Loan A 4500
Loan B 750
Sundry Liab 5000
21250 21250

Realisation A/c
Part Amt Part Amt
To Sundry Assets 21250 By Bank 24000
To Bank 5000 By Other Liab 5000
To PCA 2750

29000 29000

PCA
Part A B Part A B
To Bank 8750 5000 Bal b/d 7000 4000
By Real 1750 1000
8750 5000 8750 5000

Bank A/c
Part Amt Part Amt
To Real 24000 By A’s loan 4500
By B’s Loan 750
By PCA: A 8750
B 5000
By Real 5000
 24000 24000

Q43
MBS
Liab Amt Assets Amt
A 25000 Cash 750
B 15000 Sundry Assets 69250
Creditors 20000
A’s Loan 10000

70000 70000

Realisation A/c
Part Amt Part Amt
To Cash(real. Exp) 350 By Cash(stock) 20000
(Debtors) 25000
(Other Assets) 20000
To Stock 69250 By B’s Cap 7500
To Debtors By Creditors 20000
To Mach
To Other Assets
To Cash(Creditors) 20000
To PCA 2900
92500 92500

PCA
Part A B Part A B
To Real -- 7500 Bal b/d 25000 15000
To Bank 26450 8950 Real 1450 1450
26450 16450 26450 16450

Bank A/c
Part Amt Part Amt
To Bal b/d 750 By A’s Cap 26450
To Real 65000 By B’s Cap 8950
 By A’s Loan 10000
By Real 350
By Real 20000
65750 65750

Q46.
MBS
Liab Amt Assets Amt
A 170000 B’s Loan 20000
B 30000 Sundry Assets 480000
A’s Loan 100000
Creditors 200000

500000 500000

Realisation A/c
Part Amt Part Amt
To Bank 200000 By Bank 450000
Sundry Assets 480000 By Creditors 200000
A:20000 30000
B:10000
680000 680000

PCA
Part A B Part A B
To Real 20000 10000 Bal b/d 170000 30000
To Bank 150000 20000
170000 30000 170000 30000
 Bank A/c
Part Amt Part Amt
To Real 450000 By Real 200000
To B’s Loan 20000 By A’s Loan 100000
By A’s Cap 150000
By B’s Cap 20000

470000 470000