Dissolution of Partnership Firm
Class 12 Accountancy · Accountancy Part I · Chapter 4
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Summary
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.
Dissolution of partnership vs firmModes of dissolution under the ActPreparation of the Realisation AccountSettlement of accounts and order of paymentClosing the books of the firm
Key terms
Dissolution of Partnership
A change in the relationship among partners while the firm continues its business as before.
Dissolution of Firm
The dissolution of partnership among all partners, bringing the firm's existence and business to an end (Section 39).
Realisation Account
The account prepared on dissolution to record the sale of assets, payment of liabilities and the resulting profit or loss.
Realisation Expenses
The expenses incurred in the process of winding up the firm, such as costs of selling assets and settling liabilities.
Firm's Debts
Liabilities owed by the firm to outsiders, which are paid out of the firm's assets before partners' claims are settled.
Settlement of Accounts
The order in which the firm's assets are applied—paying outside debts, partners' loans, and finally partners' capitals.
Extra questions & answers
Try one from this chapter
Dissolution of partnership differs from dissolution of a firm because in dissolution of partnership: