Explain the process of dissolution of partnership firm.
Explain the process of dissolution of partnership firm.
Dissolution of a partnership firm results in the business being discontinued. Dissolution consists of disposing off assets, clearing payment for liabilities and distributing the profit or loss among all partners.
A firm may be dissolved by the following ways:
1. Dissolution by agreement which can be with consent of all partners or a contract between all partners.
2. Dissolution which becomes compulsory when all partners become insolvent or any changes in government policies making the business illegal.
3. Dissolution that is based on certain condition such as a fixed period, purpose, death of a partner or insolvency of a partner/partners
4. Dissolution by a written notice given by a partner with the intention to dissolve the firm.
5. Dissolution by court on account of a partner becoming lunatic, indulged in illegal activities, found guilty of misconduct, incapable to perform duties or dissolution reason found justified.
Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.
1. Amount which is received on sale of assets should be used in the following order
i. Paying off all external expenses and liabilities
ii. Loans and advances that are owed to partners should be cleared.
Iii.Capitals of all the partners should be paid off.
Any amount that still remains after paying off all these items should be distributed among partners of the dissolved firm in their original profit sharing ratio.
2. In case of loss and capital deficiency, the following should be paid in order:
i. Adjust loss and capital deficiency against profits of firm.
ii. Adjust against the total capital of the firm.
iii. If there exists any loss or deficiencies after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.
Dissolution of a partnership firm results in the business being discontinued. Dissolution consists of disposing off assets, clearing payment for liabilities and distributing the profit or loss among all partners.
A firm may be dissolved by the following ways:
1. Dissolution by agreement which can be with consent of all partners or a contract between all partners.
2. Dissolution which becomes compulsory when all partners become insolvent or any changes in government policies making the business illegal.
3. Dissolution that is based on certain condition such as a fixed period, purpose, death of a partner or insolvency of a partner/partners
4. Dissolution by a written notice given by a partner with the intention to dissolve the firm.
5. Dissolution by court on account of a partner becoming lunatic, indulged in illegal activities, found guilty of misconduct, incapable to perform duties or dissolution reason found justified.
Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.
1. Amount which is received on sale of assets should be used in the following order
i. Paying off all external expenses and liabilities
ii. Loans and advances that are owed to partners should be cleared.
Iii.Capitals of all the partners should be paid off.
Any amount that still remains after paying off all these items should be distributed among partners of the dissolved firm in their original profit sharing ratio.
2. In case of loss and capital deficiency, the following should be paid in order:
i. Adjust loss and capital deficiency against profits of firm.
ii. Adjust against the total capital of the firm.
iii. If there exists any loss or deficiencies after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.
