Chapter:5

What are Dissolution Of A Partnership Firm?

Dissolution Of Partnership

Dissolution of Partnership means change in relationship between partners but the firm may continue its business as before.

Dissolution Of A Partnership Firm

Dissolution of the firm means dissolution of partnership among all the partners in the firm. In such a case, the business of the firm also comes to an end.

Modes of dissolution of partnership firm :

  • Dissolution by mutual agreement
  • Compulsory dissolution

(a) On insolvency of partners

(b) On business becoming illegal

  • Dissolution by notice
  • On the happening of an event

(a) On death of a partner

(b) On expiry of term

(c) On completion of the venture

(d) By adjudication of a partner as insolvent

  • Dissolution by court

(a) A partner becomes a person of unsound mind.

(b) A partner becomes permanently incapable of performing his duties.

(c) Partnership agreement is breached persistently by any partner.

(d) A partner is found guilty of misconduct

(e) Court finds the dissolution of the firm justified.

(f) Court finds firm cannot be carried except at a loss.

Journal Entries on Dissolution of a Firm

Transfer of Assets
(Except cash and bank balance)
Realisation A/c
To Sundry Assets A/c
Dr. At book value
Transfer of Liabilities
(Except partner’s loan, capital and undistributed profits)
To Realisation A/c
To Deceased Partner’s Executor’s A/c
Dr. At book value
Sale of Assets Cash/Bank A/c
To Realisation A/c
Dr. At selling price
Assets Taken Over by Partner Partner’s Capital A/c
To Realisation A/c
Dr. At agreed value
Sale of Unrecorded Assets (Which did not exist in the balance sheet) Cash/Bank A/c
To Realisation A/c
Dr. Amount received on sale
Payment of Liabilities Realisation A/c
To Cash/Bank A/c
Dr. Amount of payment
Any Liability Taken Over by the Partner Realisation A/c
To Partner’s Capital A/c
Dr. At agreed value
Payment of Realisation Expenses Realisation A/c
To Cash/Bank A/c
Dr. Amount of payment
Payment of Unrecorded Liability (Which did not exist in the balance sheet) Realisation A/c
To Cash/Bank A/c
Dr. Amount of payment
Payment of Realisation Expenses by any Partner Realisation A/c
To Partner’s Capital A/c
Dr. Amount of payment
Credit Balance of Realisation Account (Profit) Realisation A/c
To Partners’ Capital/Current A/c
Dr. In profit sharing ratio
Debit Balance of Realisation Account (Loss) Partners’ Capital/Current A/c
To Realisation A/c
Dr. In profit sharing ratio

Accounting Treatment On Dissolution

Following accounts are opened in the books of the Firm

  • Realisation Account
  • Partners’ Loan Account
  • Partner’s Capital Account
  • Cash/Bank Account

Dr.

Realisation Account

Cr.

Particulars Amount (₹) Particulars Amount (₹)
To Sundry Assets A/c [Excluding cash, bank, fictitious asset, accumulated losses, debit balance of partners’ capital/current A/c, loans to partner(s)] ... By Sundry Liabilities A/c [Excluding partners’ capital, loan from partner(s), reserve, accumulated profit etc.] ...
To provision on any liability A/c ... By Provision on Any Assets A/c ...
To Bank/Cash A/c (Amount paid for discharging liabilities) ... By Bank/Cash A/c (Amount received on realisation of assets) ...
To Bank/Cash A/c (Expenses on realisation) ... By Bank/Cash A/c (Amount received from unrecorded assets) ...
To Partners’ Capital/Current A/c (Liability taken over by a partner or remuneration/commission paid to him or any expenses beared by him) ... By Partners’ Capital A/c (Assets taken over by a partner recorded or unrecorded) ...
To Partners’ Capital/Current A/c (Profit on realisation) ... By Partners’ Capital/Current A/c (Loss on realisation)* ...
... ...

Pollination

Note: All provisions created against any asset or liability/provision for doubtful debts, provision for depreciation should be transferred to realisation account on credit or debit side as the case may be and it should be noted that those assets or liabilities should appear in realisaition account at gross value.

Partner’s Loan Account

Partner’s loan will be paid only after all outside liabilities are paid in full. Thus, partner’s loan account is not transferred to realisation account and a separate account is prepared namely partner’s loan account and is paid off by passing the following entry :

Partner’s Loan A/c  Dr.
 To Cash/Bank A/c

Partners’ Capital Account

Balance of partners’ capital accounts and current accounts are recorded in this account. Any assets of firm taken over by the partner is recorded on the debit side of their capital account and any liability taken over is recorded on the credit side of their capital account.

Dr.

Partners’ Capital Account

Cr.

Particulars X(₹) Y(₹) Particulars X(₹) Y(₹)
To Balance b/d (Debit balance) ... ... By Balance b/d (Credit balance) ... ...
To Profit and Loss A/c (Loss) ... ... By General Reserve A/c ... ...
To Advertisement Expenditure A/c ... ... By Profit and Loss A/c (Profit) ... ...
To Realisation A/c (Assets taken over) ... ... By Workmen’s Compensation Fund A/c ... ...
To Realisation A/c (Loss on realisation) ... ... By Realisation A/c (Liabilities taken over) ... ...
To Cash/Bank A/c (Excess cash paid) By Realisation A/c (Profit on realisation) ... ...
By Cash/Bank A/c (Cash brought in) ... ...
... ... ... ...

Cash/bank Account

Dissolution of a firm, cash account (or bank account) is prepared and closed at the end.

Dr.

Cash/Bank Account

Cr.

Particulars Amount(₹) Particulars Amount(₹)
To Balance b/d (Cash in hand or cash at bank) ... By Balance b/d (Bank overdraft) ...
To Realisation A/c (Assets realised) ... By Realisation A/c (Liabilities paid) ...
To Partner’s Capital A/c
(Cash brought in by a partner)
... By Realisation A/c
(Realisation expenses paid)
...
By Partner’s Loan A/c (Partner’s loan paid) ...
By Partner’s Capital A/c (Excess cash paid to partner) ...
... ...