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:
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.
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.