Dissolution Of a Partnership Firm Class 12 Notes Accountancy

Dissolution of a Partnership Firm

What is Dissolution?

It means the Closure of firm and end of business relationship among all partners

As per Sec. 39 of Indian Partnership Act 1932, “Dissolution of Partnership Firm means Dissolution of Partnership among all the Partners in a Firm”.

Modes of Dissolution of Partnership Firm

1) By Mutual Agreement among the Partners.

2) Compulsory Dissolution as per the law if the Partners become insolvent or Business becomes Unlawful.

3) In case of Partners at will, the firm may be dissolved if one or more partners give notice of their intention to dissolve the firm.

4) On Happening of an event such as Death of a partner or on adjudication of a partner as insolvent.

5) The court may pass the orders for Dissolution, given a partner becomes a person of unsound mind or is found guilty of misconduct.

The following accounts are prepared in order to give effect to the dissolution of a firm:

Realisation Account
Partner's Loan A/c
Partner's Capital A/c
Cash Or Bank A/c

(The above mentioned accounts will be prepared in the above mentioned order)

Note: If both Cash and bank A/c are given in the question, then only one account is prepared. If cash account is prepared, then an entry is passed for withdrawing the Bank balance and if Bank account is prepared, then an entry is passed for depositing the cash balance in the Bank.

Tip: If the Cash A/c gets tallied in the end, your answer is most probably correct in that case (at least arithmetically)

Settlement of Assets and Liabilities

All settlement takes place through a newly opened Account called as Realisation Account. Except for Cash/Bank transactions and transactions involving Partner's Capital Account, All Transactions are completed with the Realisation Account.

Firstly, All Assets and Liabilities are to be transferred at book values to the Realisation Account.

Journal Entries:

1. For Asset Transfer:

Realisation A/c Dr.

To Asset A/c

2. For Liabilities Transfer

Liabilities. A/c Dr.

To Realisation A/c

3. For fictitious assets:

Partner's Capital A/c Dr.

To Profit and Loss A/c

To Deferred Revenue Expenditure A/c

(Being fictitious assets transferred to partner's capital account in profit sharing ratio)

Necessary journal entries required to be passed after the above ENTRIES:-

1. When assets are sold in cash:

Cash A/c Dr.

To Realisation A/c

2. When assets are taken over by partners:

Partner's Capital A/c Dr.

To Realisation A/c

3. When Assets are taken over by Creditors/Liabilities:

*Full Settlement* - No Entry

*Part Settlement* -

a) Cash A/c Dr.

To Realisation A/c (Receipts)

(Being the asset not taken over by the creditors realised)

b) Realisation A/c Dr.

To Cash A/c (Payments)

(Being the creditors {liabilities} balance paid off after taking iver the assets)

4. When Liabilities are paid off:

Realisation A/c Dr.

To Cash A/c

5. Liabilities paid by partners:

Realisation A/c Dr.

Partner's capital A/c

6. Realisation expenses:

a) Paid by firm:

Realisation A/c Dr.

To Cash A/c

b) Paid by a Partner on behalf of the firm:

Realisation A/c Dr.

To Partner's capital A/c

c) Borne and Paid by partner:

*No entry*

(because the expenses don't belong to the firm, and hence there will be no entry)

d) Commission paid to partner for bearing expenses:

Realisation A/c. Dr.

To Partner's Capital A/c

e) Expenses paid by firm on behalf of the Partner.

Partner's Capital A/c. Dr.

To Cash A/c

(Being expenses to be borne by the partner paid by the firm)

Note- The main emphasis lies upon who, is to bear the expenses, the Expense Bearing party would be Dr. And when paid by firm, Cash A/c is Credited.

Also, if the question is silent about the treatment of the realisation expenses, it is assumed that the firm has to bear the realisation expenses and it has met the realisation expenses.

7. Distribution of Realisation profits and losses:

Profit - Realisation A/c Dr.

To Partner's Capital A/c

Loss - Partner's Capital A/c Dr.

To Realisation A/c.

8. Treatment For Partner's Loan:

a) Loan taken from a partner

*It is paid Separately as a Liability*

Partner's Loan A/c Dr.

To Cash A/c

b) Loan given to a partner:

Partner's Capital A/c Dr.

To Loan given to a partner A/c

9. Workmen Compensation Reserve (WCR):

a) No Liability against WCR:

Workmen Compensation Reserve A/c Dr.

To Partner's Capital A/c

b) Liability less than amount of Reserve:

Workmen Compensation Reserve A/c Dr.

To Realisation A/c (Amount of Liability)

To Partner's Capital A/c (Remaining balance)

c) Amount of Liability equal to the Reserve Amount:

Workmen Compensation Reserve A/c Dr.

To Realisation A/c

d) Liability is more than Reserve Amount:

Workmen Compensation Reserve A/c Dr. (entire amount of WCR will be transferred to the realisation account)

To Realisation A/c.

10. All the Provisions relating to assets are required to be closed:

Provision for Doubtful Debts A/c Dr.

Provision for Depreciation A/c Dr.

Machinery Replacement reserve A/c Dr.

Investment Fluctuation Fund A/c* Dr.

To Realisation A/c

* To be transferred to Realisation only when any investment occurs on the asset side, otherwise it will be transferred to Partner's Capital Account.

11. All the reserves need to be closed:

General Reserve A/c Dr.

Reserve Fund A/c Dr.

Contingency Reserve A/c Dr.

Profit and Loss A/c Dr.

Workmen Compensation Reserve A/c (adjustments relating to it already discussed) Dr.

To Partner's Capital A/c

Important Notes:

1. All Assets which are Not Realised are assumed to be unsold, and no further treatment takes place. That is, if the question is silent about the realisation of an asset, it is assumed that the asset has not realised any amount.

2. All unrecorded Liabilities are required to be paid off:

Realisation (Unrecorded Liability) A/c Dr.

To Cash A/c

3. Unrecorded asset may or may not be sold, but if it is taken over/sold, necessary treatment takes place:

Cash A/c or Partner's capital A/c Dr.

To Realisation (Unrecorded Asset) A/c

4. No entry to be passed if Unrecorded Liabilities are settled through unrecorded Assets.

5. After the transfer of provision relating to assets, like provision for doubtful debts, no entry is passed thereafter for it.

6. If the question is silent about payment of a liability, it is assumed that it is paid in full amount.

BALANCE SHEET

The following Balance Sheet is a summary of the above entries, and shows where each item would go:

Liabilities	Account where the item would go	Assets	Account where the item would go
Creditors, Provident fund, Loans,Partner's Wife Loan, B/P, Advance Incomes, Bank Overdraft, Bank Loan	Realisation Account (since they are third party liabilities)	Plant and Machinery, Land and Building, Furniture and Fixtures, Investment, Debtors, B/R, Prepaid expenses, Accrued Incomes, Livestock, Goodwill	Realisation Account
Investment Fluctuation Fund, Provision for depreciation, Provision for Doubtful Debts , WCF (upto claim), Repair and Renewal reserve	Realisation Account	Cash, Bank	Cash or bank Account
General reserve, reserve Fund, WCF, Profit and Loss Account, Partner's Capital and Current Account	Partner's Capital Account	Profit and Loss Account (Loss), Deferred revenue expenditure, Advertisement Suspense Account, Drawings Account, Current Account	Partner's Capital Account
Partner's loan Account	Partner's Loan Account

Format of Realisation Account:

Closing Partner's Capital A/c:

When the partner is required to bring in cash:
Cash/Bank A/c Dr.

To Partner's Capital A/c

When a partner is paid his credit balance:

Partner's Capital A/c Dr.

To Cash/ Bank A/c

Goodwill:

It will be treated like any other asset and will go in realisation account if given in the balance sheet. And will be realised only if mentioned in the question. The entries of realisation will be same as for any other asset as discussed previously.

Partner's Loan Account:

The partner's loan account will separately paid off. However, if there is a debit balance of the partner's capital account (after all adjustments), the loan account will be first adjusted towards this debit balance, and the rest will be paid off.

Journal Entry:

Partner's loan A/c Dr.

To Partner's Capital A/c (The amount of debit balance)

To Bank A/c (Balance amount left after adjusting the debit balance)

If the Balance Sheet is not given in the question, the first thing to do is prepare the balance sheet on the date of dissolution. It will reveal some missing figures which will be used to solve the question further.