LDISSOLUTION OF PARTNERSHIP FIRM

Dissolution  means breaking up or undoing.There are two types of Dissolution:-

1-Dissolution of Partnership

Dissolution of partnership changes the existing relationship between partners but the firm may continue its business as before.It takes place in the following circumstances.

  1. Changes in PSR among partners

  2. Admission of a new Partner

  3. Retirement/Death of a partner

  4. A partner becomes insolvent etc

  5. Completion the venture

  6. Expiry of the period of partnership


2-Dissolution of a Firm

When the partnership between all the partners of a firm comes to an end ,it is called dissolution of a firm.When the firm is dissolved , it leads to the closure of the business.


Modes  of the dissolution of a firm

  1. Dissolution by agreement

A firm is dissolved 

   a) With the consent of all the partners

   b) As per the terms of the partnership agreement


  1. Compulsory dissolution

A firm is dissolved compulsorily in the following cases: 

  a) When the business of the firm becomes illegal 

  b) When all the partners or all except one become insolvent 

  c) When all the partners or all except one decides to retire from the firm 

  d) When all the partners or all except one die


  1. On the happening of certain contingencies

In the absence of an agreement to the contrary, a firm will be dissolved in the following cases:

   a) If  constituted for a fixed period, by the expiry of that term

   b) If constituted to carry out one or more ventures, by the completion thereof; 

   c) By the death of a partner

   d) By the declaration of a partner as an insolvent


  1. Dissolution by notice

If any one of the partners gives a notice in writing to other partners, signifying his intention to dissolve the firm.


  1. Dissolution by court

a)   When a partner becomes of unsound mind 

b)   When a partner becomes permanently incapable of performing his duties as a partner 

c)   When the partner transfers all of his interest in the firm to a third party 

d)   When the business of the firm is can’t be carried on at a loss. 

e)   When the partner commits breach of agreement relating to the management of the firm 

f)   When, on any ground, the court regards dissolution to be just and equitable



                       Distinction between   Dissolution of Partnership   and      Dissolution of Firm

Basis

Dissolution of partnership

Dissolution of Firm

1-Termination of business

Business is not terminated

The business is terminated

2-settlement of Assets and liabilities

Assets and liabilities re valued and new B/S prepared

Assets are sold,liabilities are paid off and balance utilised towards settlement of partners

3-Court intervention

Court does not intervene.Dissolution of partnership by mutual agreement

A firm can be dissolved by the court order

4-Economic relationship

Economic relationship still continues,but with some changes

Economic relationship among the partners comes to an end

5-Closure of books

Books of accounts are not closed as the business is not terminated 

All books of accounts are closed as business is terminated

 


Settlement of Accounts

In case of dissolution of a firm, the business is discontinued and the firm has to settle its accounts.For this purpose , all the assets of the firm are sold and liabilities are paid off and the balance available is distributed amongst the partners.


Order of settlement of Accounts

  1. Realisation expenses

  2. Debt of the firm to third parties

  3. Repayment of loans from partners.

  4. Repayment of capital contributed by partners.

  5. The balance amount shall be divided among the partners in the Profit sharing ratio



The following accounts are prepared for the purpose of dissolution


1-Realisation Account :-It is a Nominal account prepared for the purpose finding out the profit or loss on realisation.


2-Capital accounts of Partners: Each partner’s capital account is credited with accumulated profit and realisation profit or debited with accumulated loss and realisation loss if any.The balance in the capital account represents the amount due to or due from each partner.It is closed by paying off or bringing in cash as the case may be.


3-Cash/ Bank Account:– After entering the cash realised and paying towards the liabilities and realisation expenses, the balance in this account equals the balance in the capital accounts of partners. When final account settlement is made cash account and partners capital account will automatically closed.


Loan from a partner

Loan from a partner is not transferred to realisation account.It is paid directly the loan accountitself.Loan from wife of a partner is treated as outside liability hence it is taken in to realisation account.



1-For closing assets accounts- except cash, bank and fictitious assets

Realisation  A/c    Dr

  To Assets A/c (Individually)


Note: Sundry debtors should be transferred at its full value without deducting the Provisions for doubtful debts.



 2- provisions

Provision for Doubtful Debts  A/c

Depreciation   A/c

Joint life policy reserve             A/c

Contingency Reserve     A/c  

Investment fluctuation fund A/c

To  Realisation A/c




3-For closing liabilities account

All outsiders liabilities are closed by transfer to Realisation A/c

Sundry Creditors  A/c

B/P             A/c

Bank    O/D   A/c

Outstanding exp: A/c

Partner’s wife’s loan A/c

To Realisation  A/c


4-For sale of Assets

Cash /  Bank   A/c Dr

        To  Realisation  A/c


5-For assets taken over by a partner

Partners capital A/c   Dr

To Realisation A/c


6-For payment of Liabilities

Realisation A/c  Dr

To Cash / bank A/c


7- If a partner agree to discharge the liability 

Realisation  A/c    Dr

To Partner’s capital A/c


8-For the amount realised from unrecorded asset or new asset including goodwill if any

Cash / Bank    A/c   Dr

To Realisation A/c


9-For payment of a Unrecorded or new liability

Realisation    A/c    Dr

To Cash/ Bank


10-For Transfer of profit or loss on realisation

In case of profit on realisation

Realisation A/c    Dr

    To Partner’s capital A/c (Individually@PSR)


In case of loss on realisation

Partners capital A/c (Individually)

    To Realisation  A/c


11-For  transfer of accumulated profits in the form of Reserve fund or general reserve:

Reserve fund/General reserve  A/c     Dr

    To Partner’s capital A/c(Individually)


12-For payment of loans due to partners

Partners loan   A/c    Dr

    To bank   A/c


13- For settlement of Partner’s accounts

The balance is paid to partners whose capital A/cs  show a credit balance

Partners Capital   A/cs    Dr (Individually)

    To Bank A/c


If the partner’s capital a/c shows a debit balance, he brings the necessary cash

Bank     A/c    Dr

  To Partners Capital   A/c


PROFORMA OF REALISATION ACCOUNT

particulars

Amount

particulars

Amount

To  Assets (individually@book value)

To Cash/bank– (payment of liabilities)

To Cash /Bank – (Payment of unrecorded 

Liabilities)

To Partners Capital A/c ( Liability assumed 

By the partners)

To Cash / Bank- Realisation  expenses


To Partners capital  A/c (Profit transferred

Partners capital a/c in their PSR)

(Balancing figure)

Xxx

Xxx


Xxx


Xxx

xxx





Xxx


By Liability (Individually @ book value)

By  Provision for Doubtful Debts/Assets

By Cash/Bank( sale of assets )

By Partner’s capital A/c( Asset taken by the 

Partner)

By Cash /Bank – (Sale of unrecorded assets)



By Partners Capital   A/c  (Loss transferred  

To partners capital A/c)

(balancing figure)


Xxx

Xxx

Xxx


Xxx

Xxx





xxx


xxx


xxx

   


     Ch.5 Dissolution of a Partnership Firm                              .  

  1. Write down the journal entries for the following at the time of dissolution of a partnership firm.       (2 Marks)
    (a) For sale of assets
    (b) For payment of realisation expenses

    Ans :(a)  Sale of Asset:
                Cash / Bank Account Dr
                        To Realisation Account
  1. b) Payment of realisations expenses:
                  Realisation Account Dr
                              To Cash / Bank Account
    (One score each for correct entry)

  1. Profit on realization is credited to _______ account.
    (a) Profit and Loss Account
    (b) Partners’ Capital Account
    (c) Revaluation Account
    (d) Profit and Loss Appropriation Account
    Ans: (b) Partners’ Capital Account


  2. At the time of dissolution of a firm, which of the following liability will be paid first ?

(a) Outstanding Salary of partners
(b) Partners Loan
(c) Partners Capital
(d) Sundry Creditors
Ans : (d) Sundry Creditors

  1. Unrecorded assets when taken over by a partner are shown in ______.

(a) Debit side of Realization Account
(b) Credit side of Bank Account
(c) Debit side of Bank Account
(d) Credit side of Realization Account
Ans : (d) Credit side of Realization Account



  1. Adithyan and Theertha are partners of Aswani Traders in the ratio of 2:3.Their Balance Sheet as on 31-12-2019 stood as follows

Balance sheet  as on 31-12-2019

Liabilities 

Amount

Assets

Amount

Capital – Adithyan 50,000

                Theertha 30,000

Sundry creditors


80,000

20,000

Land and Buildings

Furniture

Stock

40,000

20,000

40,000

 

1,00,000

 

1,00,000

Prepare realisation account on the assumption that the firm is dissolved on the above date by considering the following:
A- Land and Building realised  Rs.60,000
B- Furniture sold for Rs.20,000
C-Stock taken over by adithyan Rs.15,000
Ans : Realisation loss 5000 ( Adithyan – 2000, Theertha – 3000)

  1. Jose and Joy are partners in a firm. Due to heavy loss in business Joy demands to dissolve the firm. Mention any four ways of dissolution of a firm.                                    (2 Marks)
    Ans : Dissolution by agreement
              Compulsory dissolution
              On happening of certain contingencies
              Dissolution by court
              Dissolution by notice
  2. A and B are partners in a firm. They decided to dissolve the firm on 31st December, 2018. Give journal entries for the following transactions on dissolution :

(a) Realisation expense of  1,500 paid by the firm.
(b) Furniture taken over by ‘A’ for ` 4,000.
(c) ‘B’ is ready to discharge the creditors ` 5,000.

Ans: a) Realisation A/c Dr     1500
                    To Cash / bank   a/c           1500

        b) A’s Capital A/c Dr     4000
                  To Realisation A/c       4000

        c) Realisation A/c Dr       5000
                  To B’s Capital A/c          5000

  1. Sumith and Amith are partners, who were share profit in the ratio of 3 : 2. Following isthe Balance Sheet as on 31st March, 2018.                                          (2020 Say)

Balance Sheet as on March 31.2018

Liabilities

Amount

Assets

Amount

Creditors

Reserve

Capital :Sumith

               Amith

53,000

15,500

25,000

25,000

Bank

Stock

Debtors                                   28,500

   Less.Prov.Doubtful debts- 500

Fixed Assets

30,000

12,000


28,000

48,500

 

1,18,500

 

1,18,500

The firm was dissolved on March 31, 2018. Prepare a realisation account with the following additional information :

(a) Stock realized at ` 1,000 less.
(b) Debtors realized at a discount of 10%.
(c) Fixed assets realized at ` 50,000.
(d) Realisation expense of ` 1,000 paid by Sumith.
Ans : Loss on realisation  – 2850 ( Sumith – 1710, Amith – 1140)

  1. State any three differences between dissolution of partnership and dissolution of firm.  (3 score)
  2. Ashina, a Commerce student is in a dilemma that she has no clear idea about the differences between dissolution of partnership and dissolution of firm. Can you help her by giving three points of difference in this regard ?

Basis

Dissolution of partnership

Dissolution of Firm

1-Termination of business

Business is not terminated

The business is terminated

2-settlement of Assets and liabilities

Assets and liabilities re valued and new B/S prepared

Assets are sold,liabilities are paid off and balance utilised towards settlement of partners

3-Court intervention

Court does not intervene.Dissolution of partnership by mutual agreement

A firm can be dissolved by the court order

4-Economic relationship

Economic relationship still continues,but with some changes

Economic relationship among the partners comes to an end

5-Closure of books

Books of accounts are not closed as the business is not terminated 

All books of accounts are closed as business is terminated

 

  1. Manu and Manoj are partners, who share profit in the ratio of 2 : 1. Following is the Balance Sheet as on 31st March 2018.

Balance Sheet of Manu and Manoj as on 31-3-2018

LIabilities

Amount

Assets

Amount

Sundry creditors

General reserve

Capital     

                                       Manu

                                       manoj

48,000

30,000


1,40,000

80,000

Cash and Bank

Stock

Sundry Debtors

Land and Building

Furniture

40,000

60,000

78,000

1,00,000

20,000

 

2,98,000

 

2,98,000

On a dispute between the partners they decided to dissolve the firm on the following terms :

(1) Realisation expenses amounted to ` 4,000.
(2) Debtors realised at a discount of 5%.
(3) Stock realised at ` 50,000.
(4) Fixed Assets realised –

        Land & Building ` 1,40,000
      Furniture ` 18,000

(5) There was an unrecorded assets of ` 5,000, which was taken over by Manu.
(6) Creditors are paid in full.

Prepare necessary ledger accounts to close the books of firm .
Ans : Realisation Profit – 25100(Manu – 16733,Manoj –  8367)
        (Capital Account Balance -Manu –  171733, Manoj – 98367)

  1. The business of the firm is terminated when _________ take place.

(a) Dissolution of Partnership
(b) Retirement of a partner
(c) Death of a partner
(d) Dissolution of firm








  1. Complete the worksheet based on the hint given below :
 

Description

Journal Entry

Hint

Transfer of assets to realisation accont

Realisation A/c     Dr
        To Assets A/c   (Individually)

a

Sale of Assets

?

b

?

LIabilities A/c     DR

       To Realisation A/c

 

  1. Rineesha and Arya are partners in the ratio of 3 : 2. Their Balance Sheet as on 31-03-2017 is given below :

Balance Sheet as on 31-03-2017

LIabilities

Amount

Assets

Amount

Capital     

                 Rineesha  22,000

                 Arya          25,000 

Creditors

Reserve fund



47,000

60,000

26,000

Bank A/c

Stock in hand

Debtors

Assets

50,000

10,000

20,000

53,000

 

1,33,000

 

1,33,000

The firm is dissolved on 31-3-2017. Prepare the Realisation Account by considering the following :

(i) Stock realized ` 9,000

(ii) Sundry assets sold for ` 45,000

(iii) Realisation expenses met ` 2,000

(iv) Creditors paid in full

Ans : Realisation Loss – 11000(Rineesh – 6600, Arya – 4400,



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