Dissolution of Partnership Firm — Class 12 Accountancy

Dissolution must distinguish between the dissolution of partnership and the dissolution of a partnership firm. Dissolution of partnership changes the existing relationship among partners—through a change in the ratio, admission, retirement, death or insolvency—while the firm may continue its business. Dissolution of the firm, under Section 39 of the Partnership Act 1932, is the dissolution of partnership among all the partners; it ends the firm's existence and the business is wound up. A firm may be dissolved by mutual agreement, compulsorily (for example on insolvency of all but one partner or on the business becoming unlawful), on the happening of certain contingencies, by notice in a partnership at will, or by an order of the court. On dissolution of the firm, the books are closed by transferring all assets (except cash and bank) and all external liabilities to a Realisation Account. Assets are sold and liabilities are paid off, realisation expenses are recorded, and the resulting profit or loss on realisation is shared by the partners in their profit-sharing ratio. Partners' loans are repaid, the partners' capital accounts are settled, and finally the cash or bank account is balanced, closing the books of the firm.