Class 12 Accountancy
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Key Points - Dissolution Of A Partnership Firm

Dissolution of a firm: As per Indian Partnership Act, 1932: “Dissolution of firm means termination of partnership among all the partners of the firm”. When a firm is dissolved, the business of the firm terminates. All the assets of the firm are disposed off and all outsiders’ liabilities and partners’ loan and partners capitals are paid.
Dissolution of Partnership: Dissolution of Partnership refers to termination of old partnership agreement (i.e., Partnership Deed) and a reconstruction of the firm. It may take place.

Change in profit sharing ratio among the existing partner?
– Admission of a partner? and
– Retirement or Death of a partner.
It may or may not result into closing down of the business as the remaining partners may decide to carry on the business under a new agreement.

Types of dissolution of firms : A partnership firm can be dissolved in any of the following ways : (A) Without the intervention of the court :

(1) When all partners agree to dissolve the firm (Sec. 40)? (2) Compulsory Dissolution (Sec. 41) (i) When all or all but one partner of the firm become insolvent. (ii) when business of the firm become unlawful. (3) On the happening of any of the following events : (Sec. 42) (i) On the insolvency of a partner. (ii) On the fulfilment of the objective of the firm for which the firm was formed. (iii) On the expiry of the term (period) for which the firm was formed. (4) By Notice (Sec. 43) : When the duration of the partnership firm is not fixed and it is at will of the partners. Any partner by giving notice to other partners can dissolve the firm. (B) Dissolution by order of the court (Sec 44) : A court on application by a partner may order the dissolution of the firm under the following circumstances : (1) When a partner has become of unsound mind. (2) When a partner has become permanently incapable of performing his duties as a partner. (3) When a partner is found guilty of misconduct that may harm the partnership.

(4) When a partner consistently and deliberately commits breach of partnership agreement. (5) When a partner transfer whole of his interest in the business firm to a third party, without the consent of existing partners. (6) When the court is satisfied that the partnership firm cannot be carried on except at a loss. (7) When the court find is that the dissolution of firm is justified and equitable.

ACCOUNTING TREATMENT ON DISSOLUTION
On dissolution of a firm, the following accounts are opened to close the books of the firm:
Realisation Account?
Partner’s Loan Account?
Partners’ Capital Accounts? and
Cash or Bank Account.

Realisation Account: It is nominal account opened on the dissolution of a firm to ascertain the profit or loss on realisation of assets and payments of outsiders’ liabilities. This account is closed by transferring the balance (i.e., profit or loss on realisation) to partner’s capital accounts.
Preparation of Realisation Account
The following Journal Entries are passed:
A. For Closing Assets Accounts: Realisation A/C
Dr.
To Sundry Assets A/C (Being assets transferred to Realisation A/c)
Note: 

1. Cash and Bank balance are not transferred to Realisation Account.

2. Assets (tangible and intangible) are transferred to Realisation Account at their
Gross Value

3. Fictitious Assets such as Debit balance of Profit and Loss Account or
Advertisement Suspense Account etc. are not transferred to Realisation Account.
These are directly debited to partners’ capital accounts in their profit sharing ratio by passing the following entry:
Partner’s capital A/c
Dr.
To Profit and Loss A/c
To Advertisement Suspense A/c (Being Balance of losses transferred to capital accounts)

4. Provisions against assets such as Provision for Depreciation or Provision for
Bad & Doubtful debts etc. are transferred to Realisation Account by passing a

Provision’s for Bad Debts A/c
Dr.
Provision’s for Depreciation A/c
Dr.
Joint Life Policy Reserve A/c
Dr.
Investment Fluctuation Fund A/c
Dr.
Machinery Replacement Reserve A/c
Dr.
To Realisation A/c ( Being Provisions & Reserves Against Assets transferred to Realisation Account)
B. For Closing Liabilities Accounts: Sundry Liabilities A/cs
Dr.
To Realisation A/c (Being sundry liabilities transferred to Realisation A/c)
Note:

1. Only third parties liabilities/outsiders’ liabilities are transferred to Realisation A/c.

2. Balance of Partner’s Loan Accounts are not transferred to Realisation Account.
Separate accounts are opened to settle such liabilities.

3. Undistributed profits and reserves are also not transferred to Realisation A/c.
These are directly credited to partners’ capital accounts in their profit – sharing ratio by passing the following entry:
Profit and Loss A/c
Dr.
General Reserves A/c
Dr.
Reserve Fund A/c
Dr.
Contingency Reserve A/c Dr.
To Partners’ Capital A/cs (Being balance of undistributed profits transferred to capital accounts)

4. Provident Fund is a liability on the firm towards employees and hence it is transferred to Realisation A/c

5. If any liability is expected to arise against any fund or reserve e.g., Workmen’s
Compensation Fund, then an amount equal to such liability is transferred to Realisation
A/c and balance ,if any, is distributed among the partners in their profit­sharing ratio by passing the following entry:
Workmen’s Compensation Fund A/c
Dr.
To Realisation A/c (Liability)
To Partners’ Capital A/cs (Balance, if any) (Being liability against workmen’s compensation fund transferred to Realisation A/c and balance distributed among partners)
Example. Workmen’s Compensation Fund shown in the liability side of Balance Sheet is Rs. 50,000. At the time of dissolution liability against this fund is estimated at

FORMAT OF REALISATION ACCOUNT
Realisation Account
Dr.
Particulars
To Sundry Assets A/c (Excluding cash or bank balance, fictitious assets, Dr. balance of P & L A/c, Dr. balance of partners' capital/ current A/cs, Loans to partners
To Cash/Bank A/c (Amount paid for discharging liabilities­recorded and unrecorded)
To Cash Bank A/c
Expenses on Realisation)
To Partner's Capital A/cs (Liabilities taken over by a commission payable to him or any expenses payable to him or
To partners' Capital A/cs (For transferring profit on
Realisation)
Rs. Particulars
By Sundry Liabilities A/c (Excluding Cr. Balance of
P & L A/c, Reserves, Partners' capital/current A/cs, Loan from Partner and Bank
Overdraft)
By Provision on any Assets
A/c (Such as Provision for
Depreciation, Provision for
Doubtful Debts, Joint Life
Policy Reserve etc.
By Cash/Bank A/c (Amount received on realisation of assets­recorded and unrecorded)
By Partners' Capital A/cs (Assets taken over by a partner
­ recorded or unrecorded)
By Partners' Capital A/cs (For transferring loss on
Realisation)
Preparation of Partners' Loan Account
If a partner has given any loan to firm, his loan will be paid
­ After payament of all the outside liabilities : but
­ Before making any payment to partners on account of capital
Partner's Loan A/c
Dr.
To Cash/Bank A/c (Being loan of a partner paid)
Dr.
Partner's Loan A/c
Particulars
Rs.
Particulars
To Cash/Bank A/c
By Balance b/d
Cr.
Rs.
Cr.
Rs.
Note: If the firm has given a loan to any partner then such loan account will show a debit balance and will appear on the asset side of Balance Sheet of the firm. Such loan accounts are settled through partner's capital account by passing the following entry: 

Partner's Capital A/c
Dr.
To Partner's Loan A/c (Being loan to partner transferred to his Capital A/c)
Preparation of Partner's Capital Accounts
After the transfer of
­ Undistributed profits and reserves
­ Profit on Realisation
­ Any liability taken over by any partner
And
­ Undistributed losses and fictitious assets
­ Loss on realisation
­ Any assets taken over by any partner
The balance of partners' capital A/cs are closed in the following manner a. For making final payment to a partner (if total of credit side is more than the total of debit side)
Partner's Capital A/c
Dr.
To Cash/Bank A/c (Being excess paid to partner in cash) b. For any amount received from a partner against debit balance in his capital account
Cash/Bank A/c
Dr.
To Partners' Capital (Being cash brought in by any partner)
Dr.
Partner's Capital A/cs
Cr.
Particulars
Rs.
Rs.
Particulars
Rs.
Rs.
To Balance b/d
By balance b/d (Dr. Balance) (Cr. Balance)
To Profit and Loss A/c
By General Reserve
A/c
To Advertisement
By Profit and Loss
A/c
To Realisation A/c
Compensation Fund (Assets taken)
By Realisation A/c
To Realisation A/c (Liabilities taken) (Loss on Realisation
By Realisation A/c
To Cash/Bank A/c (Profit on Realisation) (Excess cash paid)
By Cash/Bank A/c (Cash brought in)

Preparation of Cash or Bank Account
This account is prepared at the end and closed last of all. This account helps in verification of the airthmetical accuracy of accounts as both sides of this account must be equal.
There should be no balance left in Cash or Bank A/c.
Note: If cash and bank balance (or Bank Overdraft) both are given in the Balance Sheet, only one A/c is prepared, either a Cash A/c or a Bank A/c. If Cash A/c is opened, an entry for withdrawing the bank balance is made: Cash A/c
Dr.
To Bank A/c (Being cash withdrawn from Bank)
If Bank A/c is opened, an entry for depositing the cash into bank is passed.
Bank A/c
Dr.
To Cash A/c (Being cash deposited into Bank)
Dr.
Cash/Bank/A/c
Cr.
Particulars
Rs. Particulars
Rs.
To Balance b/d
By Balance b/d (Cash in Hand or Cash at (Bank Overdraft)
Bank)
By Realisation A/c
To Realisation A/c (Liabilities Paid) (Assets Realised)
By Realisation A/c
To Partners' Capital A/cs (Realisation Expenses Paid) (Cash brought in by
By Partner's Loan A/c partner) (Partner's Loan Paid)
By Partners' Capital A/cs (Excess cash paid to partner

Distinction between Revaluation Account and Realisation Account
Basis of - Revaluation Account - Realisation Account - Difference

Purpose
It is prepared to show assets
It is prepared to ascertain the and liablities in the books at profit or loss on sale of assets their revised values and repayment of liabilities.
When to be
It is prepared at the time of
It is prepared at the time of prepared change in profit sharing ratio dissolution of a firm among the existing partner, admission, retirement and death of a partner.
Preparation
This account may be
This account is prepared only of Account prepared at a number of once during the life of a firm times during the life of a firm

This account records only those
This account records all assets assets and liabilities whose book (except cash, fictious assets values have been changed etc.) and all outside liabilities
Result
A firm continues its business
A firm comes to an end after even after the preparation of preparation of realisation revaluation account. account
Preparation of Memorandum Balance Sheet
If a balance sheet on the date of dissolution is not given in the question, then it is always advisable to prepare Memorandum Balance Sheet on the date of dissolution to ascertain the amount of balancing figure.
Note: ­ In the absence of any other information "Sundry Assets" should be treated as balacing figure on the assets side of Balance Sheet.
­ If the balances of Partners' Capital A/cs are not given as on the date of dissolution, first we will find the balance of partners' capital accounts as on the date of dissolution by recasting the capital accounts.
­ When "Sundry Assets" are given in the question and nothing is specified about the difference on the asset side of Balance Sheet, the difference should be treated as Dr. balance of Profit and Loss A/c.
Some common mistakes committed by the students in Examination
­ Entries for Assets or liabilities taken by partners
­ Dissolution Expenses
­ Realisation of unrecorded assets
­ Payments of Unrecorded Liabilities
­ Treatment of Fictitious Assets
Due care should be taken while showing the effect of above mentioned items.