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.” It means the business of the firm ends. All the assets of the firm are disposed off and all
outside Liabilities and partner capital are paid.

Mode of dissolution of the firm :

1. Dissolution by agreement
2. Compulsory Dissolution
3. On the happening of an event like insolvency of a partner
4. Dissolution by notice
5. Dissolution by court

Admission of a partner-Important Questions-1

Dissolution of a partnership:

Dissolution of a partnership means termination of the old partnership agreement and a reconstitution of firm due to admission, retirement, and death of a partner. In dissolution of a partnership, the remaining partners may agree to carry on the business under a new agreement.

Dissolution of Partnership Firm class 12

Settlement of accounts:
Section-48 of the Indian Partnership Act 1932, deals with the Settlement of Account at a time
of Dissolution of Firm.
 Treatment of Losses;
Losses are to be paid first out of Profit, then out of Capital, and 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 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 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 the following is applied in Case of 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 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

Realisation Account is a Nominal Account that is prepared at a time of Dissolution of a firm to ascertain profit and loss from 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.

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.

(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 s
(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