Kerala Plus Two Accountancy Notes Chapter 5 Dissolution of Partnership
Summary
Dissolution of Partnership Firm
When the partnership between all the partners of a firm comes to an end it is called dissolution of partnership firm. When the firm is dissolved, it leads to the closure of the business – firm’s book of accounts are closed, assets of the firm realised, liabilities are paid off and whatever remains is paid to the partners in settlement oftheir accounts.
Dissolution of Partnership
When the relation of partnership among different partners changes without affecting the entity of the firm, it is called dissolution of partnership. Dissolution of partnership takes place in the case of admission, retirement, death etc. This does not necessarily involve dissolution of partnership firm.
Modes of dissolution of firm
- Dissolution by agreement
- Compulsary dissolution
- Dissolution on the happening of certain contingencies.
- Dissolution by notice
- Dissolution by court
Accounting treatment
The following accounts are prepared on dissolution.
Realisation account
Realisation account is a nominal account prepared for the purpose of closing the accounts of assets and liabilities and for finding out the profit or loss on realisation of assets and payment of liabilities. The profit or loss on realisation is transferred to partners’ capital accounts in their profit sharing ratio.
Capital accounts of partners
Each, partner’s capital account is credited with accumulated profit and realisation profit, if any, and debited with accumulated loss and realisation loss. After making any other adjustments, as per agreement, the balance in the capital account represents the amount due to or due from each partner. Partners’ capital accounts are closed by paying off orbringing in cash, as the case may be.
Cash/Bank account
After entering the cash realised from assets and paying towards liabilities and realisation expenses the balance in this account equals the balance in the capital accounts of all partners. When settlement is made cash/bank account and partners’ capital accounts wil automatically be closed.
Journal entries usually passed at the time of dissolution of a partnership firm are the following
1. For closing the accounts of assets and transferring the same to realisation account.
2. For closing the accounts of liabilities and transferring to realisation account.
3. For transferring provisions relating to assets if any
4. For transferring provisions relating to liabilities
5. (i) On realising or selling the assets
(ii) If an asset is taken over by a partner
6. (i) On paying the liabilities (external)
(ii) If a partner agrees to discharge a liability
7. (i) When realisation expense is met by the firm
(ii) If realisation expense is paid by a partner Realisation a/c
8. (i) For the amount realized from new or unrecorded asset
(ii) If an unrecorded or new asset is taken over by a partner
9. (i) If any new or unrecorded liability is paid
(ii) If any new or unrecorded liability is taken over by a partner
10. For transferring realisation profit to partners’ capital
11. For transferring accumulated profits and reserves.
12. On discharge of loans to partners
13. For cash brought in by a partner, if required so
14. For cash paid off to a partner, as the case
