Dissolution of Partnership Firm Class 12

Dissolution of Partnership firm:

As per 39 of the Partnership Act 1932, “Dissolution of the firm means dissolution of partnership among all the partners in the firm.”

Dissolution of partnership firm means that the firm closes down
its business and comes to an end. In such a case, the assets of the firm are realized and liabilities are paid off and out of the remaining amount, the accounts of the partners are settled.

Dissolution of a partnership:

Dissolution of Partnership refers to termination of the old partnership agreement and reconstitution of the firm due to a change in profit-sharing ratio among the existing partners, admission of a partner, or retirement or death of a partner. It may or may not result into the closing down of the business as the remaining partners may agree to carry on the business under a new agreement. dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit-sharing ratio among partners;
(2) Admission of a new partner;
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if the partnership is formed for that; and
(7) Expiry of the period of the partnership, if the partnership is for a specific period
of time;

Dissolution of a Partnership vs dissolution of Partnership firm

1. Meaning	Dissolution of Partnership means there is a change in the business relationship among all the partners and the firm continues to run.	Dissolution of a Firm means termination of the firm and end of business relationship among all the partners.
2. Termination of the business	The business is not terminated.	The business of the firm is closed.
3. Settlement of Assets and liabilities	Assets and revalued and new balance sheet is drawn.	Assets are sold and liabilities are paid-off. The balance amount, if any, is distributed among all the partners.
4. Court’s intervention	The court does not intervene because partnership is dissolved by mutual agreement.	A firm can be dissolved by the court’s order.
5. Economic relationship	Economic relationship between the partners continues though in a changed form.	Economic relationship between the partners comes to an end.
6. Closure of books	Does not require because the business is not terminated.	The books of account are closed.
7. Effects	Dissolution of Partnership may or may not involve the dissolution of the firm.	Dissolution of a Firm leads to the closure of the business and also the end of the partnership.

Mode of dissolution of the firm :

1. Dissolution by agreement (Section 40) : A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
2. Compulsory Dissolution(Section 41) : A firm may be compulsorily dissolved
a) When all the partners or all the partners except one become insolvent.
b) When the business of the firm becomes unlawful.
3. On the happening of an event (Section42 ) : A firm may be dissolved in any of the following events if the partnership deed so provides
a) On expiry of the term for which the firm was constituted
b) On completion of the venture
c) On the death of a partner
d) On adjudication of a partner as insolvent
4. Dissolution by notice (Section 43) : In the case of Partnership at Will, the firm may be dissolved by any partner by giving notice in writing to all the other partners of his intention to dissolve the firm.
5. Dissolution by court ( Section44 ) : The Court may dissolve a form on any of the following grounds, namely
a) When a partner has become of unsound mind.
b) When a partner has become permanently incapable of performing his duties as a partner.
c) When a partner is found guilty of misconduct.
d) When there is a Breach of Agreement by the partner.
e) That the business of the firm cannot be traced to the extent of the contract.
f) The court finds the dissolution of the firm justified.
On any other ground that renders it just and equitable, the firm should be dissolved.

Admission of a partner-Important Questions-1

Dissolution of Partnership Firm class 12

Settlement of accounts:
Section-48 of the Indian Partnership Act 1932, deals with the Settlement of Accounts at a time of Dissolution of Firm.
 Treatment of Losses;

i) Losses are to be paid first out of Profit,
ii) then out of Capital, and
iii) lastly if necessary by the Partners Individually in the Proposition of their Profit- Sharing Ratio.
 Application of Assets;

The amount realized from the Assets of the Firm including any sum of money contributed by
the Partners to makeup Deficiencies of Capital shall be applied in the following manner:

(a) First to Pay the Firm’s Debt to the Third Parties, i.e. Outside Parties,
(b) Then to Pay Loan from Partners,
(c) Then to pay Capital of Partners.
(d) Lastly the Surplus (if any) shall be distributed among the Partners in their Profit-sharing
Ratio

Settlement of Fictitious assets:

Fictitious assets such as advertisement suspense, preliminary expenses and Loss, etc, directly
transferred to the partner’s capital Account in their profit-sharing ratio.

Settlement of Unrecorded assets:

Unrecorded assets must be realized and shown credit side of the realization Account.

Settlement of liabilities:

(a) All outside liabilities must be paid off even if nothing is stated for their payment.
(b) Unrecorded liabilities are also paid through cash or settled by unrecorded assets or settling recorded assets.
(c) Contingent liabilities discounting of B/R become liability must be settled or paid.

Payment of Firm’s Debts and private Debts:

Section-49 of IPA1932 deals with the following applied in the Case of a Firm’s Debt and Private Debt.
(i) Firm’s Property is applied first in payment of Firm’s Debts and if there is any surplus,
then the share of each Partner is applied in the payment of his Private Debts or paid to
him.
(ii) Partner’s Private Property is applied first in payment of his Private Debts and the Surplus
(if any), in payment of the Firm’s Debts if the Firm’s Liabilities exceed the Firm’s Assets.

ISC ACCOUNTS Sample paper 2023

Accounting Treatment of Dissolution of a Partnership Firm:

The following necessary Accounts are prepared to close the books at the time of Dissolution of a Firm;

(i) Realization Account
(ii) partner’s capital Account
(iii)partner’s loan Account
(iv) Cash/Bank Account

Goodwill questions for practice Class 12 ISC & CBSE

Dissolution of Partnership Firm class 12

(i) Realization Account

A Realisation Account is a Nominal Account that is prepared at the time of Dissolution of a firm to ascertain profit and loss from the realization of assets and payment of outsider’s liabilities which may be transferred to the partner’s capital A/c in the profit-sharing ratio.
Features of Realisation Account:

1. Realisation account is prepared on the dissolution of the firm.
2. Realisation account is a nominal account.
3. Realisation account is prepared to find out the profit/loss on the sale of Assets and repayment of liabilities.
4. Book value of Assets and Liabilities, the realized value of Assets, and the actual payment of liabilities are recorded in this account.
5. This account is prepared only once during the lifetime of a firm.
6. Realisation account records the realisation of assets and settlement of liabilities.
7. Partners Loan Account (shown in B/S) is not transferred to the Realization account .
8. The Loan amount will be transferred to the credit side of the cash account by passing the
entry :
Partner’s Loan A/c  Dr
To Cash/ Bank A/c
9. Do not transfer capitals of the partners, and accumulated reserve and profit.

The following necessary Steps are adopted for Accounting Treatment of Realisation Account;
Step 1. Entry for transfer of all accounts except Partner’s Loan A/c, Partners’ Capital A/c s, Undistributed Profit or Losses and Cash/Bank A/c given in the balance sheet:

(a) For Transfer of Assets to Realisation A/c;
Realisation A/c ……Dr. (at its Book value)
To Various Assets A/c (Individually by name)

* Provision which has a credit balance will be transferred to the credit side of realisation account and the following entry will be passed:
Provision for Depreciation A/c Dr
Provision for Bad Debts A/c Dr.
Provision for Discount on Debtors A/c Dr.
Investment Fluctuation Fund A/c Dr.
Joint Life Policy Fund A/c Dr.
To Realisation A/c

Note*Provision which has a debit balance will be transferred to the debit side of
Realization account and the following entry will be passed:
RealisationA/c Dr.
To Provision for Discount on Creditors A/c
(For provision against liabilities transferred to realisation account)

(b) For Transfer of Outside Liabilities to Realisation A/c;
Various Liabilities A/c (Individually by name) ……Dr. (at its Book value)
To Realisation A/c

Step 2. Entry for collection of sale proceeds from assets:
(a) For Cash Sales of Assets;
Cash/Bank A/c ……Dr.
To Realisation A/c

(b) For Assets taken over by a Partner;
Partner’s Capital A/c ……Dr.
To Realisation A/c
Note: Realised against assets can be more than, less than or equal to Book value of the asset.

(c) When the Assets are given away to any of the Creditors towards the Full / Partial
Payment of his Dues, there may be Three Situations;
(i) When a creditor accepts an asset as full and final settlement, no journal entry is required.
(ii) When a creditor accepts his payment by taking over an assets and part of his payment in
cash, the following entry will be made for cash payment only;
Realisation A/c ……Dr.
To Cash/Bank A/c

(iii) When a creditor accepts an asset where the value is more than the amount due to him, he
will pay cash. Entry will be as follows;
Cash/BankA/c …….Dr.
To Realisation A/c

Step 3. Entry for payment of Dissolution/Realisation expenses:

(a) For cash payment of expenses:
Realisation A/c ……Dr.
To Cash/Bank A/c

(b) For payment of expenses made by a partner or fixed amount for expenses is credited to partner’s capital account:
Realisation A/c …….Dr.
To Partner’s Capital A/c

(c) If any partner is to bear all expenses of realisation himself no journal entry is required.

(d) If the realisation expenses are paid by the firm on the behalf of bearing partner:
Partner’s Capital A/c ……Dr,
To Cash/Bank A/c
(e) When Realisation Expenses are borne by one Partner and paid by another Partner:
Bearing Partner’s Capital A/c …….Dr.
To Paying Partner’s Capital A/c

Step 4: Entry for payment of outside liabilities:

(a) For Cash Payment of Liabilities :
Realisation A/c …….Dr.
To Cash/Bank A/c

(b) For Liabilities Taken Over by a Partner:
RealisationA/c …….Dr.
To Partner’s Capital A/c

Step 5: Entry for Closing of Realisation Account:

(a) Realisation Account Shows Profit: (When the Credit Side is Bigger)

Realisation A/c …..Dr. (amount of profit)
To Partner’s Capital A/c s (share of partners’profit)

(b) Realisation Account shows Loss;(When the Debit side is Bigger)

Partners Capital A/c …….Dr. (share of partners’loss)
To Realisation A/c (amount of loss)

Dissolution of Partnership Firm class 12

Format of Realisation Account:

Hidden Goodwill at the time of Admission of A New Partner

Dissolution of Partnership Firm class 12

(2) Partners Loan Account:

If partner has given any loan to the firm it will be shown credit side of partners loan account and paid off. Entry will be as follows;
Partner’s loan A/c …….Dr.
To Cash/Bank A/c
(Being partner’s loan paid off)

Dissolution of Partnership Firm class 12

(3) Partners Capital Account:

* Balance of partners’ capital accounts and current accounts are recorded in this account.

*If partners have taken over firm’s assets, these are recorded in the debit side of their capital
accounts.

*If they pay liabilities of the firm, these are recorded credit side in their capital accounts.

*Undistributed Profits and Reserves transferred credit side of their capital accounts.

*Accumulated losses transferred debit side of their capital accounts.

*Profit on realization transferred credit side of their capital accounts.

*Loss on realization transferred debit side of their capital accounts.

* Final settlement with partners or closing the account by bringing in or paying
cash.

(a) On Transfer of Undistributed Profits and Reserves
Profit and Loss A/c …….Dr.
Reserve Fund A/c
To Partners’ Capital A/c
(b) In case of accumulated losses
Partners’Capital A/c s …….Dr.
To profit and Loss A/c
Final Settlement with Partners:
(a) On Bringing Cash by Partners for Deficiency in Capital
Cash/Bank …….Dr.
To Partners’ Capital A/c
(b) On Payment to Partners or Closing the Partners’ Capital Accounts
Partners’ Capital A/c s …….Dr.
To Cash/Bank A/c

ACCOUNTING TREATMENT OF GOODWILL AT THE TIME OF ADMISSION OF A NEW PARTNER

Dissolution of Partnership Firm class 12

(4) Cash and Bank account:

This is an account that shows the cash balance at the time of the Dissolution of the Firm. The
opening balance of cash or bank will be shown on the debit side of the cash/ bank account. All the receipts from the sale of the assets and the amount brought in by partners are shown on the debit side while all the payments of liabilities expenses and amount paid to partners’ are shown on the credit side.

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 the 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 of a partner transferred to his Capital A/c)

Dissolution of Partnership Firm class 12

Format of Profit and loss Appropriation Account

Important questions of fundamentals of partnership-2

Important questions of fundamentals of partnership-5

Dissolution of Partnership Firm Class 12

ISC GUIDELINES 2026 Exam:

*  When accounts are prepared on a fixed capital basis, partners’ current account balances are to be transferred to the capital account. No adjustments are required to be passed through current account.
* Bank overdraft is to be taken to the Bank/Cash A/c and not to be transferred to realization account but bank loan must be transferred to the realization account.
* If question is silent about the payment of a liability, then it has to be paid out in full.
* If the question is silent about the realized value of tangible assets and investments it should be considered as realized at book value itself.
* If the question is silent about the realized value of intangible assets, accrued income and prepaid expenses it should be considered as nil (zero value).
* Loan taken from a partner will be passed through cash or bank account even if the partner’s capital account has a debit balance.
* Loan given to a partner will be transferred (debited) to his Capital account.
* Realization expenses – paid by the firm; paid by a partner; borne by a partner; to be borne by a partner but paid by the firm on his behalf; partner reimbursed by the firm for the realization expenses paid by him with an asset of the firm.