Dissolution of Partnership firm

Dissolution of Partnership firm

Dissolution of Partnership firm?

Dissolution of partnership firm means that the firm closes down its business and comes to an end. The dissolution of the firm implies a complete breakdown of the partnership relation among all the partners.    

On the dissolution of the partnership firm, assets of the firm are sold and liabilities are paid off and out of the remaining amount, the accounts of partners are settled. If there is a shortfall in meeting outside liabilities, it is met by the partners from their private assets.

According to section 39 of the Indian Partnership Act,1932 ” The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’.

Key Points of  Dissolution of Partnership firm:

  • Dissolution of partnership firm means Closure of the firm and end of business relationship among all the partners.
  • The business of the firm comes to an end.
  • Books of accounts of the firm are closed.
  • Assets of the firm are sold.
  • liabilities are paid off. 
  • The accounts of partners are settled.
  • If there is a shortfall in meeting outside liabilities, it is met by the partners from their private assets, because the liability of the partner is unlimited.
  • The Economic relationship between the partners comes to an end.

Difference between Dissolution of firm and Dissolution of Partnership

Basis Dissolution of Firm Dissolution of Partnership
Meaning It means the closure of the firm and the end of the business relationship among all parties. It means a change in business relationships among the partners. The firm continues its business.
Courts’ Intervention It can be either voluntarily by the partners or compulsorily or by the order of the court. It is always voluntary.
Business Continuation The business of the firm comes to an end after dissolution. The business of the partnership firm continues after the dissolution of partnership.
Assets and liabilities Assets of the firm are realized and liabilities are settled. The balance amount, if any, is distributed among all the parties. Assets of the firm are revalued and liabilities are reassessed. The profit or loss due to it is distributed among the partners in their old profit-sharing ratio.
Economic Relation Economic relationship among the partners comes to an end. Economic relationship among the partners’ changes.
Effect Dissolution of a firm affects the partnership. Dissolution of partnership may or may not affect the firm.
Closure of books of Account Books of account of the firm are closed Books of account of the firm need not to be closed.

Dissolution of Partnership firm

Modes of dissolution of partnership firm:

1. Dissolution by Agreement (Sec.40)  : A firm is dissolved in case

a.All the partners give consent or

b.As per the terms partnership agreement.

2. Compulsory dissolution (Sec.41): A firm is dissolved compulsorily in the following cases

a.When all the partners or all excepting one partner becomes insolvent or of unsound mind.

b.When the business becomes unlawful.

c.When all the partners excepting one decide to retire from the firm.

d.When all the partners or all excepting one partner die.

e.A firm is also dissolved compulsorily if the partnership deed includes any provision regarding the happening of the following events (Sec.42)

   (a) expiry of the period for which the firm was formed,

  (b) completion of the specific venture or project for which the firm was formed.

3. Dissolution by Notice (Sec.43): In case of a partnership at will, the firm may be dissolved if any one of the partner gives a notice in writing to the other partners.

4. Dissolution by Court (Sec.44): A court may order a partnership firm to be dissolved in the following cases:

  (a) When a partner becomes of unsound mind

  (b) When a partner becomes permanently incapable of performing his/her duties as a partner,

  (c) When partner deliberately and consistently commits breach of agreements relating to the management of the firm;

  (d) When a partner’s conduct is likely to adversely affect the business of the firm;

  (e) When a partner transfers his/her interest in the firm to a third party;

   (g) When the court regards dissolution to be just and equitable.

MODE OF SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS (Section48)

In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :
(a) Treatment of Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;
(b) Application of the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Dissolution of Partnership firm

PAYMENT OF FIRM’S DEBTS AND OF SEPARATE OR PRIVATE DEBTS (Section49)

FIRM’S DEBTS:

FirmsDebts refers to those debts that are borrowed against the name of the firm. Or Firm’s debts are debts owed by the firm to outsiders.

SEPARATE OR PRIVATE DEBTS:

Private debts are debts owed by the partners to the outsiders. Concerned partners is liable personally for his private debts.

Where there are joint debts due from the firm, and also separate debts due from any
partner, the property of the firm shall be applied in the first instance in payment of
the debts of the firm, and, if there is any surplus, then the share of each partner
shall be applied in payment of his separate debts or paid to him.

The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in payment of the debts of the firm.

Dissolution of Partnership firm

Accounting Treatment on Dissolution of firm:

On the dissolution of the partnership firm, assets of the firm are sold and liabilities are paid off and out of the remaining amount, the accounts of partners are settled. If there is a shortfall in meeting outside liabilities, it is met by the partners from their private assets.
It means On the dissolution of the partnership firm, the books of accounts of the firm will have to be closed. Dissolution Process starts by preparing the following accounts:

  1. Realisation Account
  2. Partner’s Capital Account
  3. Partner’s Loan Account
  4. Cash Or Bank Account+

Also Read: REALISATION ACCOUNT (Meaning)

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