Study Material & Notes
Dissolution of a partnership means termination of old partnership agreement and a reconstitution of firm due to admission, retirement and death of a partner. In dissolution of a partnership the remaining partners may agree to carry on the business under a new agreement.
Basis | Dissolution (Reconstitution) of Partnership | Dissolution of Partnership Firm |
Meaning | Dissolution of partnership means change in existing relations of the partners. The firm continues its business. | Dissolution of a firm means the dissolution of partnership among all the partners of the firm and the firm’s business is closed |
Closure of books | It does not require closure of books of account because business is not closed. | Books of Account are closed as the business is closed |
Court’s Intervention | Court does not intervene because partnership is dissolved by mutual agreement | A firm may be dissolved by court order |
Settlement of assets and liabilities | Assets are revalued and liabilities are reassessed | All the Assets other than cash are realized and liabilities are paid |
Economic Relationship | Economic relationship between the partners changes | Economic relations between the partners comes to an end |
Continuity of business | Business of the firm continues | Business of the firm comes to an end |
Effect | Dissolution of partnership may or may not involve dissolution of firm | Dissolution of firm also means dissolution of partnership |
In case of a partnership at will, the firm may be dissolved if any one of the partner gives a notice in writing to the other partners.
(a) Treatment of Losses:-
Losses, including deficiencies of capital, shall be paid :
(i) first out of profits,
(ii) next out of capital of partners, and
(iii) lastly, if necessary, by the partners individually in their profits sharing ratio.
(b) Application of Assets
The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i) In paying the debts of the firm to the third parties;
(ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan);
(iii) In paying to each partner proportionately what is due to him on account of capital; and
iv) the residue, if any, shall be divided among the partners in their profit sharing ratio.
Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.
Firm’s Debts | Private Debts |
Debts owned by the firm to the outsiders | Debts owned by a partner in his/her personal capacity e.g. Home Loan fm Bank |
Utilization of Firm’s Property | Utilization of Partner’s Property |
(a) Firm’s Debts | (a) Private Debts |
(b) Private Debts | (b) Firm’s Debts |
Study Material & Notes
Liabilities |
Treatment |
Assets |
Treatment |
Partners’ Capital/Current Account |
Partners’ Capital |
Goodwill |
Realisation |
General Reserve/Profit & Loss A/c |
Partners’ Capital |
Land & Buildings |
Realisation |
Workmen Compensation Reserve |
Various scenarios |
Plant & Machinery |
Realisation |
Investment Fluctuation Reserve |
Realisation |
Cash & Bank |
Separate A/c |
Creditors/Bills Payable |
Realisation |
Stock, Prepaid Exp |
Realisation |
Partners’ Loan Accounts |
Separate A/c |
Debtors |
Realisation |
Partners’ Relative Loan Accounts |
Realisation |
Provision for doubtful debts |
Realisation |
Bank Loan/Bank Overdraft |
Realisation |
Investments |
Realisation |
Provident Fund/Pension Payable |
Realisation |
Fictitious Assets |
Partners’ Capital |
Income Received in Advance |
Realisation |
Profit & Loss (Dr. Balance) |
Partners’ Capital |
Transaction | Entry | Amount |
| Realisation A/c……….Dr. To Respective Assets A/c (Assets transferred to Realisation A/c) | Debit Credit |
| Respective Liabilities A/c……….Dr. To Realisation A/c (Liabilities transferred to Realisation A/c) | Debit Credit |
| Cash A/c……….Dr. To Realisation A/c (Amount realised on sale of assets) | Debit Credit |
| Respective Partner’s Capital A/c……….Dr. To Realisation A/c (Asset taken over by Partner) | Debit Credit |
| Realisation A/c……….Dr. To Cash/Bank A/c (Settlement of liabilities in cash) | Debit Credit |
| Realisation A/c……….Dr. To Respective Partner’s Capital A/c (Liability taken over by Partner) | Debit Credit |
| No Entry | |
| Realisation A/c……….Dr. To Cash/Bank A/c (Settlement of liabilities in cash) | Debit Credit |
| Cash/Bank A/c……….Dr. To Realisation A/c (Amount realised on sale of assets) | Debit Credit |
| Realisation A/c……….Dr. To Partners’ Capital A/c (Profit on Realisation transferred to Partners Capital A/c) | Debit Credit |
| Partners’ Capital A/c……….Dr. To Realisation A/c (Loss on Realisation transferred to Partners Capital A/c) | Debit Credit |
Dr. Cr.
Particulars | Amount | Particulars | Amount |
To All Asset A/c (Except Cash/Bank) To Cash/Bank A/c (Payment of external liabilities) To Partners’ Capital A/cs (Liability paid by partners) To Cash/Bank A/c (Expenses on Realisation) To Partners’ Capital A/cs (Realisation exp paid by Partner) To Partners’ Capital A/cs (Transferring profit on Realisation) | Book Value | By All Outside Liabilities A/c By Cash/Bank A/c (Amount realized on sale of assets) By Partners’ Capital A/cs (Assets taken over by partners) By Partners’ Capital A/cs (Transferring loss on Realisation)
| Book Value |
Study Material & Notes
Transaction |
Entry |
Amount |
When Partner has either credit or debt Balance in his/her Capital A/c |
Partner’s Capital A/c……….Dr. To Loan To Partner A/c (Partner Loan A/c is transferred to Partner’s Capital A/c) |
Debit Credit |
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Balance b/d |
By Partner’s Capital A/c |
||
Total |
Total |
Transaction | Entry | Amount |
(i) When Partner has credit Balance in his/her Capital A/c | Partner’s Loan A/c……….Dr. To Cash/Bank A/c (Repayment of Partner’s Loan A/c by cash) | Debit Credit |
(ii) When Partner has debit balance in his/her Capital A/c | Partners’ Loan A/c……….Dr. To Partner’s Capital A/c (Partner’s Loan transferred to Partner’s Capital A/c) | Debit Credit |
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Bank or Partner’s Capital A/c |
By Balance b/d |
||
Total |
Total |
After all the adjustments related to partners’ capital accounts and transfer of profit or loss on realisation to the partners’ capital accounts, the capital accounts are closed in the following manner:
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Fictitious Assets/Undistributed Losses A/c To Realisation A/c (Assets taken over) To Partner’s Loan A/c To Partner’s Current A/c (Debit balance) To Realisation A/c (Loss) To Cash/Bank A/c (Surplus in Capital A/c) |
By Balance b/d By Reserves/Accumulated Profits By Realisation A/c (Liabilities taken over) By Partner’s Current A/c (Credit balance) By Partner’s Loan A/c By Realisation A/c (Expenses) By Realisation A/c (Gain) By Cash/Bank A/c (Deficit in Capital A/c) |
||
Total |
Total |
Transaction | Entry | Amount |
(i) In case of Surplus i.e. Credit balance, the partner needs to be paid off balance in his/her account in cash | Partner’s Capital A/c……….Dr. To Cash/Bank A/c (Cash paid to Partner) | Debit Credit |
(ii) In case of Deficit i.e. Debit balance e partner, the partner needs to be bring in balance in his/her account in cash | Cash/Bank A/c……….Dr. To Partner’s Capital A/c (Cash brought-in by the Partner) | Debit Credit |
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Balance b/d To Realisation A/c (sale of assets) To Cash A/c (if both Cash & Bank A/cs) To Partner Capital A/c (settlement) |
By Realisation A/c (payment of liabilities) By Realisation A/c (expenses) By Partner Loan A/c (repayment) By Realisation A/c (Bank overdraft) By Partner Capital A/c (settlement) |
||
Total |
Total |
Transaction | Entry | Amount |
(i) For Cash deposited into Bank | Bank A/c……….Dr. To Cash A/c (Cash deposited into Bank) | Debit Credit |
((ii) For Cash withdrawn from Bank | Bank A/c……….Dr. To Cash A/c (Cash withdrawn from Bank) | Debit Credit |
Transaction | Entry | Amount |
(i) In case of Surplus i.e. Credit balance, the partner needs to be paid off balance in his/her account in cash | Partner’s Capital A/c……….Dr. To Cash/Bank A/c (Cash paid to Partner) | Debit Credit |
(ii) In case of Deficit i.e. Debit balance e partner, the partner needs to be bring in balance in his/her account in cash | Cash/Bank A/c……….Dr. To Partner’s Capital A/c (Cash brought-in by the Partner) | Debit Credit |
If both Cash A/c as well Bank A/c are given in the question, assume Cash is deposited into Bank. Pass the journal entry & do Ledger posting accordingly.
Reserve | Claim | Journal Entry | Amount |
Yes | No | Workmen Compensation Reserve A/c………Dr To All Partners Capital A/c (in their PSR) | Reserve Amount Reserve Amount |
No | Yes | Realisation A/c………………………………………….Dr. To Cash/Bank A/c | Claim Amount Claim Amount |
Yes | Yes | Realisation A/c………………………………………… Dr. | Claim Amount |
Claim>WCR | To Cash/Bank A/c | Claim Amount | |
Workmen Compensation Reserve A/c………Dr. To Realisation A/c | Reserve Amount Reserve Amount | ||
Yes | Yes | Realisation A/c………………………………………… Dr. | Claim Amount |
Claim<WCR | To Cash/Bank A/c | Claim Amount | |
Workmen Compensation Reserve A/c………Dr To Realisation A/c To All Partners Capital A/c (in their PSR) | Reserve Amount Claim Amount Reserve – Claim |
Situation | Type | Born by | Paid by | Journal Entry |
Dissolution expenses borne and paid by the Firm | Expenses | Firm | Firm | Realisation A/c…………………Dr. To Cash/Bank A/c |
Expenses borne by firm and paid by Partner | Expenses | Firm | Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Firm gives contract to Partner (including expenses) | Remuneration | Firm | Due to Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Expenses | Partner | Partner | No Entry | |
Expenses | Partner | Firm | Partner’s Capital A/c……………Dr. To Cash/Bank A/c | |
Firm gives contract to Partner (excluding expenses or question is silent on who paid) | Remuneration | Firm | Due to Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Expenses | Firm | Partner | Realisation A/c…………………Dr. To Cash/Bank A/c | |
Expenses | Firm | Partner | Realisation A/c……………Dr. To Partner’s Capital A/c | |
Expenses borne by firm and paid by Partner | Expenses | One Partner | Another Partner | Partner’s Capital A/c…………Dr. (Bearing expenses) To Partner’s Capital A/c (Paying expenses) |
Study Material & Notes