Dissolution of Partnership Notes3

Study Material & Notes for the Chapter 7

Partnership - Dissolution of Partnership

III. ACCOUNTING TREATMENT ON DISSOLUTION OF PARTNERSHIP

2(A) Loan Given by Firm to Partner
  1. A firm may have given to Loan to a partner
  2. Loan Given to a Partner is an Asset
  3. On Dissolution Loan given to a Partner is closed and transferred to respective Partner’s capital A/c
Journal Entries


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


Loan to Partner Account

Dr.                                                                                                                                                                    Cr.

Particulars

Amount

Particulars

Amount

To Balance b/d

By Partner’s Capital A/c

Total

Total

2 (B) Loan Given by Partner to Firm
  • A firm may have received Loan from a partner
  • Loan from a Partner is not an Outside Liability hence it is not transferred to the Realisation A/c
  • Accounting treatment for Loan received from Partner’s is to first close the Partner Capital A/c making all adjustments related to transfer of Free reserves, Fictitious assets, Assets/liabilities taken over, Profit/Loss on realisation etc.
  • Treatment of Loan given by a partner depends on the balance in partner’s capital account at this stage:
    • If Partner has Credit balance in his/her Capital A/c, balance in his/her Loan A/c is repaid in cash
    • If Partner has Debit balance in his/her Capital A/c, balance in his/her Loan A/c is transferred to his/her Capital A/c
Journal Entries

 

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

Loan to Partner Account

Dr.                                                                                                                                                                    Cr.

Particulars

Amount

Particulars

Amount

To Bank or Partner’s Capital A/c 

By Balance b/d

Total

Total

3 Partner’s Capital Accounts

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:

Partner’s Capital Account

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

Journal Entries

 

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

4 Cash Account
Cash Account

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

Journal Entries

 

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

Journal Entries

 

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

Important to Note:

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.

Treatment of Workmen Compensation Reserve and Claim
  • Payment of Workmen Claim in all the cases is routed through Realisation A/c
  • Workmen Compensation Reserve to the extent of Workmen Claim is transferred to Realisation A/c
  • Workmen Compensation Reserve in excess of Workmen Claim is distributed to Partner’s Capital A/c

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

  • WCR in excess of Workmen Claim is distributed to Partner’s Capital A/c
Treatment of Workmen Compensation Reserve and 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)

error: Content is protected !!