Steps and Accounting Treatment in Dissolution of a Partnership Firm
Dissolution of a partnership firm in Class 12 Accountancy refers to the process where a partnership business is formally closed. This topic is crucial for board exams, competitive tests, and practical business understanding. Grasping it ensures students can handle journal entries, settlement, and legal aspects of shutting down a partnership professionally.
| Type of Dissolution | Basis | Description |
|---|---|---|
| Dissolution of Partnership | Change in partnership agreement; firm continues | Only a change in partners; the business is not closed (e.g., on admission/retirement). |
| Dissolution of Partnership Firm | Complete closure | The business is wound up, assets sold, liabilities paid, and partners’ relationships end. |
What is Dissolution of Partnership Firm?
Dissolution of a partnership firm means the formal closure of business, ending the partnership, selling assets, and paying off all liabilities. It is different from mere changes in partnership (like admission or retirement). After dissolution, the partnership business no longer exists, and all economic activities are stopped.
Key Steps in Dissolution of a Partnership Firm
There are systematic steps for dissolution, which must be followed for legal and accounting compliance. These steps also appear often in board and competitive exams.
- Transfer all assets and liabilities (except cash, bank, capital accounts) to the Realisation Account.
- Sell assets and realize cash; pay liabilities and expenses.
- Settle partner loans and outside borrowings.
- Distribute any profit or loss from realization among partners.
- Distribute remaining cash to partners according to their capital balances.
Accounting Treatment: Realisation Account and Journal Entries
A Realisation Account is prepared to record the disposal of firm’s assets and settlement of outside liabilities. This ensures transparency in profit or loss on dissolution. Knowing the correct journal entries is key for scoring in exams and for practical business accounting.
| Transaction | Journal Entry |
|---|---|
| Transfer of assets to Realisation Account | Realisation A/c Dr. To Respective Assets A/c |
| Transfer of liabilities to Realisation Account | Respective Liabilities A/c Dr. To Realisation A/c |
| Sale of assets | Cash/Bank A/c Dr. To Realisation A/c |
| Payment of liabilities | Realisation A/c Dr. To Cash/Bank A/c |
| Asset taken over by partner | Partner’s Capital A/c Dr. To Realisation A/c |
| Liability paid by partner | Realisation A/c Dr. To Partner’s Capital A/c |
| Distribution of profit/loss on realization | Realisation A/c Dr. To Partners’ Capital A/c (if profit) or Partners’ Capital A/c Dr. To Realisation A/c (if loss) |
Format of a Realisation Account
| Debit Side | Credit Side |
|---|---|
| Assets transferred Realisation Expenses Liabilities Paid Loss transferred to Partners |
Liabilities transferred Cash from Asset Sales Assets taken over by Partners Profit transferred to Partners |
For sample problems and practical solutions, refer to DK Goel Class 12 Solutions Chapter 4 and the comprehensive collection of Dissolution of Partnership Firm Class 12 Questions and Answers on Vedantu.
Settlement of Accounts and Section 48 of Partnership Act
Section 48 of the Indian Partnership Act governs the order of payment during dissolution. Understanding this order helps students solve both theoretical and practical questions accurately in exams.
- Pay off outside liabilities and expenses first.
- Settle loans and advances given by partners (not capital).
- Pay back partners’ capital balances.
- Any balance remaining is distributed among partners as per their profit-sharing ratio.
For a legal context, visit The Indian Partnership Act 1932.
Practical Problems and Solved Examples
Solving practical questions is the best way to master dissolution of partnership firm. Vedantu offers detailed, stepwise solutions, journal entries, and ledger accounts for all typical board exam questions.
- Calculation of profit/loss on realization
- Accounting for unrecorded assets/liabilities
- Partner’s loan settlement
- Order of payments and entries
Access solved problems at Realisation Account and Its Concept and Accounting for Partnership Firm.
Difference between Dissolution and Reconstitution
Many students confuse dissolution with reconstitution. Reconstitution means change in the internal structure (e.g., admission/retirement), while dissolution means the end and closure of the business. Visit Reconstitution of Partnership Firm for more details.
How This Topic Helps Students
Dissolution of a partnership firm is part of Class 12 board exams, CA Foundation, Commerce Olympiads, and business entrance tests. It also develops practical knowledge for future accountants, auditors, or business owners. At Vedantu, we make such commerce topics simple and exam-focused for your success.
Page Summary
Dissolution of a partnership firm covers business closure, steps, legal provisions, accounting treatment, and settlement order. Mastering this ensures you handle board, entrance, and practical business questions confidently. For more solved questions and PDFs, visit Vedantu’s dedicated Class 12 Accountancy resources.
FAQs on Dissolution of a Partnership Firm – Class 12 Accountancy Chapter 5
1. What is dissolution of a partnership firm?
Dissolution of a partnership firm refers to the termination of the partnership agreement and the winding up of the firm's affairs. It involves realizing assets, settling liabilities, and distributing the remaining funds among partners. This process is governed by the Indian Partnership Act, 1932 and involves several key steps, including creating a Realisation Account.
2. What are the steps involved in dissolving a partnership firm?
The dissolution process typically involves these key steps:
1. Realization: Selling off firm assets.
2. Settlement of Liabilities: Paying off firm creditors and other liabilities.
3. Distribution of Assets: Distributing the remaining assets (after paying off liabilities) among the partners as per the partnership agreement or the Indian Partnership Act, 1932, Section 48. This often involves preparing a Realisation Account and partner's capital accounts.
3. What is a Realisation Account in dissolution?
A Realisation Account is a crucial aspect of dissolving a partnership. It's used to record the sale of assets and payment of liabilities during the dissolution process. It shows the profit or loss arising from the realization of assets and settlement of liabilities. The profit/loss is then transferred to the partners' capital accounts. This account helps determine the final amount due to each partner.
4. How are unrecorded assets and liabilities treated during dissolution?
Unrecorded assets and liabilities must be accounted for during the dissolution process. Unrecorded assets are added to the Realisation Account, while unrecorded liabilities are deducted. Appropriate journal entries are passed to reflect these adjustments in the books of accounts. This ensures a fair and accurate representation of the firm's financial position during the dissolution.
5. What is the sequence of payments as per Section 48 of the Partnership Act?
Section 48 of the Indian Partnership Act, 1932, outlines the order of priority for settling liabilities during dissolution. Generally, the order of payment is:
1. External Liabilities: Creditors, loans, etc.
2. Partner's Loan Accounts: Amounts owed to partners as loans.
3. Partner's Capital Accounts: Amounts owed to partners as capital contributions.
6. Where can I download Class 12 dissolution of partnership solutions in PDF?
Downloadable PDFs of Class 12 Accountancy Chapter 5 solutions on dissolution of a partnership firm are often available on educational websites and online learning platforms. Check the resources section of your textbook or your online learning platform for access to these study materials.
7. What is the difference between dissolution of partnership and dissolution of firm?
While often used interchangeably, there's a subtle difference. Dissolution of partnership refers to the termination of the partnership agreement, while dissolution of the firm refers to the complete winding up of the business, including the settlement of all assets and liabilities. The latter is a necessary consequence of the former.
8. What is the accounting treatment if a partner takes over an asset below its book value?
If a partner takes over an asset at a price below its book value, the difference is treated as a loss on realisation. This loss is debited to the Realisation Account and reduces the amount available for distribution amongst the partners. Appropriate journal entries are required to reflect this transaction.
9. How is a partner's insolvency handled during dissolution under the Garner v. Murray rule?
Under the Garner v. Murray rule, if a partner is insolvent, their deficiency is shared among the solvent partners in proportion to their capital balances. This ensures that the insolvent partner's debt is covered, and the remaining assets are distributed fairly among the solvent partners. The Realisation Account will reflect the adjustments.
10. What is the difference between dissolution by agreement and dissolution by court order?
Dissolution by agreement occurs when all partners mutually agree to dissolve the partnership. Dissolution by court order happens when a court of law orders the dissolution due to reasons like a partner's bankruptcy or disagreement among partners. The legal process and accounting implications differ in these two scenarios.
