What is a Partner's Capital Account?
The dissolution of a partnership firm is said to occur when the business relationship among the partners ceases. The firm discontinues all of its business activities. The partnership agreement between the partners comes to an end. After dissolution, a partnership firm prepares a realisation account, and the partner’s capital accounts for easy settlement of accounts. After making necessary adjustments, the profit realised is distributed between the partners. According to The Indian Partnership Act, the dissolution of partnership among all the partners is called dissolution of the firm.
Partner’s Capital Account Defined
The Partner's Capital Account is where all money that changes hands between partners and the company is kept. Some of the kinds of deals included are as follows:
Money or the fair market value of other assets that the partners initially and subsequently contribute to the firm.
Earnings from operations are divided among the partners following the terms of the partnership agreement.
Partners get distributions.
The closing balance is the remaining amount that has not been allocated to the partners as of the conclusion of the accounting period. A partner's potential liquidating payout following the partnership dissolution accounting may or may not be equal to their original investment in the partnership's capital account. The final liquidation payment will reflect any discrepancies between the market worth of the partnership's assets and the book value in case of a sale or settlement of obligations.
Settlement of the Accounts at the Time of Dissolution
Following a business's dissolution, the finances must be settled following Section 48 of the Indian Partnership Act of 1932. Section 48 stipulates the following regulations:
The company's losses and shortcomings must be made up for.
Corporation's net income.
Sum of money.
The percentage of shared profits each partner owed (if necessary).
If the company's assets are to be divided up at all, it must do so in the following order.
The company should satisfy the obligations of the outside parties.
Use this account to settle the firm's obligations to its partners and make distributions to them that are separate from the initial investment.
Each partner is responsible for contributing their proportionate share of the initial money.
The partners must divide the excess assets following their stake in the business's profits.
Modes of Dissolution of Partnership Firm
The following are different methods of dissolution of partnership firm:
By mutual agreement between the partners
Compulsory dissolution as per the law if the partners become insolvent or the business becomes unlawful
The firm may dissolve when one or more partners give notice of their intention to dissolve the firm
In the event of an event such as the death of the partner, insolvency of the partner, or expiration of the period for which the firm was formed
Dissolution of Partnership Firm Journal Entries
Difference Between Dissolution of Firm and Dissolution of Partnership
Dissolution of a partnership firm means the closure of the firm and the end of the business relationship among partners. This includes disposing of all the assets and paying off all the liabilities. The business is terminated. On the other hand, the dissolution of a partnership means a change in the business relationship between the partners. This is due to the retirement of a partner, death, or any other case. The remaining partners may continue the business. The old partnership agreement is terminated, and a new partnership agreement takes place.
Dissolution: All Assets Are Transferred to Realisation Account
After dissolution, the realisation account is maintained to determine net profit/loss on realisation.
All the recorded assets except for cash at the bank at book value (including goodwill but excluding fictitious assets) are debited to the realisation account.
Sundry debtors and provision for bad debt accounts are two separate accounts, and the total amount of debtors should be transferred.
Winding up of Partnership Firm
Winding up of a partnership firm is a procedure that distributes or liquidates any remaining property of the firm and any assets that remain after the dissolution of the partnership firm. This involves the collection of any remaining business assets, settlement of remaining debts, and distribution of remaining assets to the concerned partners.
Causes of Business Dissolution in a Partnership
Why Do Partnership Firms Dissolve
The various causes of dissolution of partnership firm are listed below:
There can be a shift in the current profit-sharing structure.
A new partner is brought into the company.
The departure of a present partner.
The passing of a current companion.
A partner's insolvency due to his incapacity to enter into binding contracts. Therefore, he is no longer an official partner in the company.
Partnerships are created for specific projects after they are finished.
When the initial forming phase of the partnership ends.
Conclusion
To dissolve a partnership firm, it is necessary to stop conducting commercial activities under the name of the partnership firm. All partnership firm responsibilities are met by selling assets or transferring them to a partner. Profits and losses in this are shared according to the partnership agreement.
When a partnership firm dissolves, it loses its name and cannot conduct business. However, provided a partnership is dissolved by consent or a specified circumstance, the firm might continue if the surviving partners sign a new partnership agreement.
FAQs on Partner's Capital Account and Bank Account During Dissolution
1. Why is a realisation account prepared?
Preparing a realisation account closes the books of a dissolved company and determines profit or loss on the sale of assets and payment of obligations. Prepared by:
All assets except Cash or Bank Account are transferred to the debit side.
All obligations except Partner's Loan Account and Partners' Capital Accounts are transferred to the credit side.
Accounting for the sale receipt.
Liabilities are paid from the account.
Deducting dissolution costs.
Profit or loss may be in the account. Therefore, we transfer this sum to Partners' Profit-Sharing Capital Accounts. Again, it would help if you looked at the dissolution of partnership firm journal entries.
2. How do you close a realisation account?
On firm dissolution, the books of account must be closed after all assets and obligations, including partners' loans and capital, are paid off.
Realisation Account debits all assets except cash and bank balance.
Dissolution expenses are credited to the account with third-party obligations, excluding partners' loans and capitals.
When selling assets for cash, debit a bank account.
Cash or Bank should pay reconciliation costs.
repay debts. Credit and debit Realisation Cash/Bank.
Realisation Profit-and-loss account. The profit-sharing ratio should incorporate capital accounts.
Repay lenders—credit bank and loan accounts.
All profit-sharing capital accounts need P&L or reserve accounts.
Partner capital account debits must be paid. Debit Cash/Bank and credit Partner's Capital Account.
Then settle capital accounts. The payment debits cash or Bank.
3. When a business partnership dissolves, what is the proper accounting procedure?
The term "dissolution of the company" refers to the process through which a business's several participants end their status as business partners (Sec. 39 of the Partnership Act, 1932). If the surviving partners decide to keep the firm going, the dissolution of the partnership will result in a change in the commercial relationship between them. As a result, a new partnership will be formed, but the business will continue in its current location.
4. Explain modes of settlement of accounts between the partners after dissolution.
The following rules shall be adopted regarding the settlement:
Treatment of losses, including deficiencies, are to be paid - i) first out of profits, ii) then out of capital, iii) at last, by the partners individually according to the profit-sharing ratio.
Application of assets, including any sums contributed by the partners regarding deficiencies of capital shall be applied - i) in paying debts of the firm to outside parties, ii) Then to pay loans from partners, iii) Then to pay capital of partners, iv) any surplus remaining should be divided among the partners in profit-sharing ratio.
5. What is the difference between a realisation account and a revaluation account?
Basis | Realisation Account | Revaluation Account |
Meaning | This account records the realisation of various assets and the settlement of various liabilities. | This account records the effect of the revaluation of assets and liabilities. |
Preparation | Prepared at the time of dissolution. | Prepared at the time of reconstitution. |
Comprise of | This account comprises all assets and liabilities. | This account comprises only those assets and liabilities which are revalued. |
Balance | The balance is transferred to the capital accounts of all partners. | The balance is transferred to the capital accounts of old partners. |
6. Why may a partnership firm be dissolved?
The following are some reasons why a partnership firm may be dissolved:
The partnership firm has outlived its purpose
The partnership firm was started on false information
When the partners have sufficient means to provide for the partnership firm
Disagreement between the partners over certain matters regarding the partnership firm
When the business is not sustaining the needs of the partners
When one of the partners has committed fraud and other partners are not likely to continue the business
When the partnership firm has a bias in favour of one partner over the others