Dissolution of Partnership Firm

What is Dissolution of Partnership Firm?

For a partnership firm to cease to exist, it needs to be dissolved. The process, known as dissolution of a partnership firm, involves the sale or disposal of all assets of the enterprise, the final settlement of all of its liabilities and settling the accounts.

The act identifies the distinction in the breaking of the association between all the partners of an enterprise and between a few partners; and it is the breaking or adjournment of the association between the partners which is known as the dissolution of partnership firm. This puts an end to the presence of an enterprise and no business concern is carried out after the dissolution apart from the pursuits associated with winding up of the enterprise as the financial affairs of the enterprise are to be affected by selling enterprise’s assets.

BASIS DISSOLUTION OF FIRM DISSOLUTION OF PARTNERSHIP
1. MEANING When the business of the firm is closed down and the partnership also comes to an end, it is termed as Dissolution of Firm. When there is reconstitution i.e. any change in the mutual business relationship of partners but the firm continues its operations, it is termed as Dissolution of Partnership.
2. COURT INTERVENTION It can be voluntary due to the decision of partners or compulsory by the order of the court. It is always voluntary.
3.CONTINUATION OF BUSINESS The business of the firm is closed. The business of the firm continues.
4. ECONOMIC RELATIONSHIP The economic relationship among the partners comes to an end. The economic relationship among partners continues but with new/changed terms.
5. BOOKS OF ACCOUNTS Books of Accounts of the firm are closed forever. Accounting treatment is required but Books of accounts of the firm are not closed.
6. SETTLEMENT OF ACCOUNTS
  • Assets are realised and liabilities are paid off; and
  • Balance, if any, is paid to the partners to settle their accounts.
  • Assets are revalued and liabilities are reassessed; and
  • Profit and loss on revaluation are distributed among the partners in their old profit sharing ratio.
7. EFFECT Both ‘Partnership’ and ‘Partnership firm’ are dissolved. ‘Partnership’ is dissolved but the firm continues.

DISTINCTION BETWEEN FIRM’S DEBTS AND PRIVATE DEBTS

BASIS FRIM’S DEBTS PRIVATE DEBTS
1. MEANING Firm’s debts are those debts which are payable to third parties. Private debts are those debts which partners owe to other persons.
2. LIABILITY All the partners are jointly and severally liable for the firm’s debts. Particular partner is liable personally for his private debt.
3. APPLICATION OF FIRM’S PROPERTY Firm’s property is applied first to settle firm’s debts. Share of particular partner in the positive balance left in firm’s property, after paying firm’s dues can be applied for private debts.
4. APPLICATION OF PRIVATE PROPERTY Excess of partner’s private property over his private debts can be applied for the firm’s debts. Private property is applied first for private debts.

In the previous concept, we had learnt and understood about the reconstitution of a partnership enterprise which takes place on the account of :

  • Admission
  • Retirement
  • Death of a partner

What is Dissolution of the Firm?

In such a scenario, when the current partnership is dissolved, the enterprise may go on under the same name if the partners determine. To put it in other words, it outcomes in the dissolution of a partnership however, not that of the enterprise. Section 39 of the partnership Act 1932 says, the dissolution of a partnership between all the partners of an enterprise is known as the dissolution of the firm.

The above mentioned is the concept that is explained in detail about the Dissolution of Partnership Firm for the class 12 Commerce students. To know more, stay tuned to BYJU’S.

Q.1- Discuss The Accounting Entries To Be Passed At The Time Of Dissolution Of Firm.

– To Close The Accounts, To Dispose Off Assets, To Discharge The Liabilities,

– To Close Reserves & Fictitious Assets A/c,

– To Settle Partners Loan A/c And Partners Capital Accounts.

Answer:
The Following Journal Entries Are To Be Passed, When A Firm Is Dissolved.
Step-1: Transfer All Real Assets

(Other Than Cash & Bank Balance)

Realisation A/c                    Dr.

To Sundry Assets A/c (individually)

(Being assets transferred to realization A/c at book value)

Step-2: Transfer All External Liabilities

& ALL FUNDS & PROVISIONS CORRESPONDING TO ASSETS (IF ANY)

Sundry Liabilities A/c (Individually)               Dr.

To Realisation A/c

(Being liabilities transferred to realization A/c)

Step-3: For Disposal Of Assets

(A) For Cash

(B) Taken Over By A Partner

(C) Given To Settle A Liability

(a) When assets are sold for cash

Cash A/c                                                   Dr.

To Realisation A/c

(Being the assets are sold for cash )

(b) When an asset is taken over by a partner

Partners’ Capital A/c                           Dr.

To Realisation A/c

(Being asset is taken over by the partner)

(c) When an asset is given to meet any liability (in full settlement)

NO JOURNAL ENTRY

Step-4: For Settlement Of Liabilities

(A) By Cash Payment

(B) Liability Settled By A Partner

(C) Liability Settled By

Giving An Asset

(a) When Liabilities are discharged in cash

Realisation A/c                                            Dr.

To Cash A/c

(Being liabilities are paid in cash )

(b) When a partner agrees to settle liability.

Realisation A/c                                             Dr.

To Partner’s Capital A/c

(Being liability paid by the partner )

(c) When an asset is given to meet any liability (in full settlement)

NO JOURNAL ENTRY

Step-5: Realisation Expenses Default Case – Borne by Firm & Paid by Firm

Realisation A/c                                               Dr.

To Cash A/c

(Being expenses on realization paid.)

Step-6: Distribution Of Profit Or Loss On Realisation (a) Distribution of Profit on Realisation:

Realization A/c                                               Dr.

To Partner’s Capital A/c (Individually)

(Being profit on realization distributed among partners in their

profit sharing ratio.)

(b) Distribution of loss on Realisation:

Partners’ Capital A/c                                   Dr.

To Realisation A/c

(Being loss on realization distributed among partners in their

profit sharing ratio.)

3-4 Marks Questions
Q.1- WHAT DO YOU MEAN BY DISSOLUTION OF A PARTNERSHIP FIRM? WHAT ARE THE DIFFERENT MODES OF DISSOLUTION OF A PARTNERSHIP FIRM?
ANSWER:
(A) MEANING OF DISSOLUTION OF PARTNERSHIP FIRM
  • Dissolution of a Partnership Firm is a situation when business is completely closed and the business relationship among the partners also comes to an end.
  • All assets are disposed of & all the liabilities are discharged i.e. settled.
  • All the claims of partners are also completely settled.
(B) FOLLOWING ARE THE DIFFERENT MODES OF DISSOLUTION OF A PARTNERSHIP FIRM:
(1) By mutual agreement or consent

(2) Compulsory Dissolution

(3) On the happening of an event (like Death of a partner, Expiry of the term, Completion of the venture, etc.)

(4) By Notice

(5) By Order of Court

Q.2- LIST THE SITUATIONS IN WHICH A JUDICIAL COURT MAY ORDER TO DISSOLVE

A PARTNERSHIP FIRM.

Answer:
FOLLOWING ARE SOME OF THE SITUATIONS IN WHICH A COURT MAY ORDER TO DISSOLVE A PARTNERSHIP FIRM:
(1) When a partner has become of unsound mind.

(2) When a partner is permanently incapacitated.

(3) When a partner is found guilty of misconduct.

(4) When there is a persistent breach of the partnership agreement by a partner.

(5) When the court is satisfied that it would be just and equitable to dissolve the firm.

Multiple Choice Questions
Q.1-Under dissolution of the partnership, the firm’s business:
a. Continues

b. Discontinue

c. Affected

d. Cease

Q.2- Dissolution of firm necessarily means dissolution of :
a. Admission

b. Retirement

c. Death

d. Partnership

Answer Key
1-a, 2-d
Multiple Choice Questions
Q.1- If any surplus is available then it is distributed among the partners in :
a. Gaining ratio

b. Sacrificing ratio

c. Profit sharing ratio

d. Old ratio

Q.2- Share of a concerned partner in excess of the firm’s property over the firm’s debts can be used to pay ___________:
a. Private debts

b. Third party debts

c. Neither (a) nor (b)

d. Second party debts

ANSWER KEY
1-c, 2-a

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