Dissolution of Partnership Notes2

Study Material & Notes for the Chapter 7

Partnership - Dissolution of Partnership

II. ACCOUNTING TREATMENT ON DISSOLUTION OF PARTNERSHIP

Accounts to be prepared
  1. Realisation Account
  2. Partner’s Loan Account
  3. Partner’s Capital Accounts
  4. Cash or Bank Account
A.  Realisation Account
  1. 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.
  2. 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.
  3. Similarly, all the external Liabilities accounts are closed and transferred at their book value crediting Realisation Account.
  4. Amount realised from the sale of assets is credited and amount paid towards discharge of liabilities is debited to the Realisation account
  5. Expenses on Realisation/dissolution are debited to this account
  6. 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
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

  1. For Transfer of Realizable Asset to Realisation A/c

Realisation A/c……….Dr.

   To Respective Assets A/c

(Assets transferred to Realisation A/c)

Debit

Credit

  1. For Transfer of Outside liabilities to Realisation A/c

Respective Liabilities A/c……….Dr.

   To Realisation A/c

(Liabilities transferred to Realisation A/c)

Debit

Credit

  1. For Sale of assets (recorded/unrecorded) on cash

Cash A/c……….Dr.

      To Realisation A/c

(Amount realised on sale of assets)

Debit

Credit

  1. For assets (recorded/ unrecorded) taken over by a Partner

Respective Partner’s Capital A/c……….Dr.

      To Realisation A/c

(Asset taken over by Partner)

Debit

Credit

  1. For Settlement of liabilities (recorded /unrecorded) in cash

Realisation A/c……….Dr.

      To Cash/Bank A/c

(Settlement of liabilities in cash)

Debit

Credit

  1. For liabilities (recorded/unrecorded) taken over by a Partner

Realisation A/c……….Dr.

      To Respective Partner’s Capital A/c

(Liability taken over by Partner)

Debit

Credit

  1. Settlement of Liability in exchange of assets of equivalent amount

No Entry

 

  1. For settlement of Liability in exchange of asset (Liability > Asset). Balance settled in cash

Realisation A/c……….Dr.

      To Cash/Bank A/c

(Settlement of liabilities in cash)

Debit

Credit

  1. For settlement of Liability in exchange of asset (Asset > Liability). Balance received in cash

Cash/Bank A/c……….Dr.

      To Realisation A/c

(Amount realised on sale of assets)

Debit

Credit

  1. Closure of Realisation A/c and Credit > Debit (means profit)

Realisation A/c……….Dr.

      To Partners’ Capital A/c

(Profit on Realisation transferred to Partners Capital A/c)

Debit

Credit

  1. Closure of Realisation A/c and Debit > Credit (means loss)

Partners’ Capital A/c……….Dr.

      To Realisation A/c

(Loss on Realisation transferred to Partners Capital A/c)

Debit

Credit

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
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

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