Study Material & Notes for the Chapter 7
Partnership - Dissolution of Partnership
II. ACCOUNTING TREATMENT ON DISSOLUTION OF PARTNERSHIP
Accounts to be prepared
- Realisation Account
- Partner’s Loan Account
- Partner’s Capital Accounts
- Cash or Bank Account
A. Realisation Account
- When the firm is dissolved it becomes necessary to settle its liabilities and dispose off its assets. The residual, if any, is taken by the partners to their home.
- For this purpose, a separate account called ‘Realisation Account’ is opened. All the Asset accounts (excluding Cash in hand/at bank and Fictitious assets) are closed and transferred at their book value debiting Realisation Account.
- Similarly, all the external Liabilities accounts are closed and transferred at their book value crediting Realisation Account.
- Amount realised from the sale of assets is credited and amount paid towards discharge of liabilities is debited to the Realisation account
- Expenses on Realisation/dissolution are debited to this account
- Realisation is a nominal Account. Excess of Credit over Debit is the profit on Realisation and is credited to Partners Capital Accounts in their profit-sharing ratio and vice versa.
Important to Note:
- If realized value of any asset is not given it means its Realisation value is zero
- If settlement value of any liability is not provided it means it is paid at book value
Treatment of Balance Sheet Items
Important to Note:
- If Realisation of any tangible/intangible is not mentioned in the question, its realizable value is deemed as nil
- If settlement value of any liability is not mentioned in the question, it is deemed to be settled at book value
- Any Provision/Fund against the asset is also transferred to Realisation A/c e.g. Provision for Depreciation, Bad debts, Discount on Debtors or Investments Fluctuation Fund