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.
- 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
Balance Sheet
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 |
Journal Entries
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 |
- 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
Balance Sheet
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 |