This GSEB Class 12 Commerce Accounts Notes Part 1 Chapter 7 Dissolution of Partnership Firm covers all the important topics and concepts as mentioned in the chapter.
Dissolution of Partnership Firm Class 12 GSEB Notes
Due to admission or retirement of partner, the structure of partnership firm keeps on changing but, the firm keeps on going. When the partnership firm closes down or the business is closed down then that is known as Dissolution of Partnership firm. Even when except one partner all partners leave the firm and the Partnership Firm is converted to Joint Stock Company then too it is known as Dissolution of Partnership Firm. In short, when in legal terms the existence of firm remains no more then it is known as Dissolution of the firm. We will study various ways in which dissolution can take place, the accounting effects of dissolution and laws and provisions regarding dissolution. We will also study the general procedure of dissolution and the accounting effects due to dissolution.
Dissolution of Partnership:
In a partnership firm new partners can be admited and few partners can retire or die, it would change the form of partnership and partners, but the firm does not dissolve and its existence continues.
Dissolution of Partnership Firm:
When a ongoing partnership firm is closed and its business is stopped i.e. in the eyes of law the existence of the firm does not remain any more it is known as Dissolution of Partnership.
Methods of Dissolution of Partnership Firm:
As per Indian Partnership Act 1932 the dissolution in two ways:
- Normal Dissolution
- Dissolution by the Court.
Accounting Treatment of Dissolution:
On dissolution of partnership firm the assets of the firm are sold to pay creditors and other liabilities. If any surplus money remains after paying creditors then partners’ capital are redeemed and the books of accounts are closed.
To close the partnership firm and give accounting effects following accounts are prepared.
- Realisation Account
- Partners’ Capital /Current Account
- Partners’ Loan Account
- Cash / Bank Account
Realisation Account:
This account is prepared to give the effects of assets and liabilities during dissolution of partnership firm. It is known as Disposal Account.
The Specimen of the same is as follows:
Journal Entries at the time of dissolution of Partnership Firm:
Generally following entries are passed at the time of dissolution of partnership firm:
| Transactions | Accounting Entry |
| 1. Closing assets account and transferred balance to Realisation account : | Realisation A/c Dr. To Sundry Assets A/c |
| 2. When provisions accounts are closed and transfered to Realisation Account : | Provisions A/c Dr. To Realisation A/c |
| 3. Closing liabilities account and transferred to Realisation Account : | Sundry Liabilities A/c Dr. To Realisation A/c |
| 4. When credit balance of on profit and loss and Reserves are given. | Reserves A/c Dr. Profit and Loss A/c Dr. To Partners capital/current A/c |
| 5. When debit balance of A/c Profit and Loss A/c is given | Partners Capital / Current A/c Dr. To Profit and Loss A/c |
| 6. When cash is realised on selling assets : | Cash / Bank A/c Dr. To Realisation A/c |
| 7. When partner takes away the asset : | Partners Capital / Current A/c Dr. To Realisation A/c |
| 8. When liabilities are paid : | Realisation A/c Dr. To Cash/Bank A/c |
| 9. When partner accepts to pay the liabilities : | Realisation A/c Dr. To Partners Capital / Current A/c |
| 10. When firm pays dissolution expense : | Realisation A/c Dr. To Cash / Bank A/c |
| 11. When partner accepted responsibility for dissolution procedure and firm pay remuneration to him | Realisation A/c Dr. To Cash / Bank A/c |
| 12. When on behalf of Partner the firm pays for the dissolution expenses: | Partners Capital / Current A/c Dr. To Cash / Bank A/c |
| 13. When partner’s loan is paid | Wife’s loan A/c Dr. To Cash / Bank A/c |
| 14. When Partner’s wife loan is repaid | Partner’s loan A/c Dr. To Cash / Bank A/c |
| 15. When the balance of realisation account is transferred to partners capital/current A/c : (i) If there is profit (ii) If there is loss |
Realisation A/c Dr. To Partners Capital / Current A/c Partners Capital / Current A/c Dr. To Realisation A/c. |
| 16. When partners’ current or capital accounts are closed and transferred to their Capital Accounts : (i) If there is credit balance in Current A/c : (ii) If there is debit balance in Current A/c : |
Partners Current A/c Dr. To Partners Capital A/c Partners Capital A/c Dr.To Partners Current A/c |
| 17. When Partners Capital accounts are closed : (i) When there is debit balance in Partners Capital account : (ii) When there is credit balance in Partners Capital account : |
Cash / Bank A/c Dr. To Partners Capital A/c Partners Capital A/c Dr. To Cash / Bank A/c |
Following points to be kept in mind while passing journal entries related to dissolution of partnership firm:
1. The cash realised by selling assets is distributed chronologically as under:
- Dissolution expense
- Third party liabilities
- Loan of Partners
- Partners capital and current account balance
- If any surplus remains after paying all of the above then the amount is distributed among partners in their profit-loss sharing ratio.
2. If the value of tangible assets is not given then it should be assumed that they have been realised at their book value.
3. If the value of intangible assets like goodwill, patents trademark etc. is not given, then it should be assumed that they have realised no money and no accounting effect of it should be given.
4. If information regarding payment of any liabilities is not given then it should be assumed that it has been paid at its book value.
5. Partners wife’s loan is repaid along with other third party liabilities.
6. If there are not sufficient funds to pay the partners loans then in the proportion of loan amount, payment is done.
7. Generally dissolution expense are borne by partnership firm.
8. If any unrecorded asset is given towards payment of any liability, then in that case what-ever amount remains to be paid after the settelment with asset is paid in cash.
9. If any unrecorded liability is paid by giving recorded asset and if any amount yet remains to be paid towards that liability then it is paid by cash.
10. As per balance of partners capital account they can take cash or they have to bring cash and accordingly the effects are given in Cash/ Bank Account and it is closed after the adjustments.
The Second Method of preparing Realisation Account:
- This method is used when it is not possible to pay all the liabilities at one time.
- After closing Assets and Liabilities they are not transferred to Realisation account but they are kept open.
- After realising the money from assets and after the payment of liabilities, the closing balance (profit or loss) is transferred to Realisation account.
- The dissolution expense is debited to realisation account.
- The closing balance of Realisation account (profit or loss) is transferred to partners capital or current account in their profit and loss ratio.