Dissolution of Partnership Firm Class 12 Accountancy Chapter 4 CBSE Notes - 2025-26

• Realisation of Assets: This involves converting the firm's assets into cash during the dissolution process. It includes selling off tangible and intangible assets and recording the proceeds in the realization account.

• Settlement of Liabilities: All outstanding debts and obligations of the firm must be paid off. This includes settling amounts due to creditors, loans, and other liabilities. Proper entries are made to reflect these payments.

• Distribution of Remaining Assets Among Partners: After settling liabilities, the remaining assets are divided among the partners based on their capital balances and profit-sharing ratios. This ensures fair distribution according to the partnership agreement.

• Preparation of Dissolution Account: This account records all transactions related to the dissolution, including the realization of assets, settlement of liabilities, and distribution of remaining assets. It helps track the firm's financial position during dissolution.

• Treatment of Unrecorded Assets and Liabilities: Identifying assets or liabilities not previously recorded in the firm’s books and accounting for them properly. This ensures that all financial elements are considered during dissolution.

• A dissolution of a partnership firm terminates economic relations between partners, involving the realisation of assets and payment of liabilities. 

• Partners' profits are shared in their profit-sharing ratio. After settlement and final payment, the firm's books are closed. 

• Partnerships can also be terminated due to partner admission, retirement, or death. 

• The Realisation Account records transactions related to asset sale and creditors' settlement.

1. When does the Dissolution of a Partnership take place?

• Modification of the partners' current profit-sharing arrangement

• Acceptance of a new associate

• A partner's retirement

• Loss of a spouse

• A partner's insolvency

• If the partnership is created for that purpose, the venture's completion

• Expiration of the partnership's period, if one has a set duration

2. When does Dissolution of a Partnership Firm take place?

• Using a contract between the partners and the approval of each partner, the firm is dissolved.

• The company must be dissolved automatically when all of the partners, or all but one, become bankrupt and are unable to enter into contracts, when the company's operations turn illegal, or when something happens that prevents the partners from conducting the company's business in partnership, such as when a partner who is a citizen of one country becomes an enemy of India due to a declaration of war against that country.

• If any of the following scenarios occur: if the entity is formed for a specific term, by the end of that term, if the entity is formed to carry out one or more ventures, by the ventures' completion, if a partner dies, or if a partner is adjudicated as an

• If the dissolution is voluntary, any partner may dissolve the company by sending a written notification to the other partners.

• The court will step in if a partner goes insane, is rendered permanently incapable of carrying out his partner responsibilities, engages in misconduct that could negatively impact the firm's business, repeatedly violates the terms of the partnership agreement, transfers all of his interest in the company to a third party, the business of the company cannot be operated without incurring a loss, or if the court determines that dissolution is just and appropriate.

3. Difference Between Dissolution of a Partnership and Dissolution of a Firm

 Settlement of Accounts

• Treatment of Losses: The losses must be covered by the company's profits in the first place, then by the capital of the individual partners following their profit-sharing ratio.

• Application of Assets: The firm's assets will be used to pay off its debts to third parties, pay each partner what is owed by the company for advances that are not capital (i.e., partner loans), and pay each partner what is owed on account of capital. Any remaining funds, if any, will be divided among the partners according to their profit-sharing arrangement. 

• Firm Debts and Private Debts: The firm's assets will be used first to pay off its debts; any remaining funds will then be distributed among the partners by their claims, and any remaining funds may be used to settle any outstanding personal obligations. If the firm's liabilities exceed its assets, any remaining funds may be used to pay off the firm's debts. 

4. What is a Realisation Account?

To document the transactions about the sale and realisation of assets as well as the settlement of creditors, the Realisation Account is prepared. Partners split any profit or loss resulting from this process according to their profit-sharing ratio. The Cash or Bank account is closed, and the accounts of the partners are likewise settled.

Journal Entries

1. For transfer of assets: Asset accounts, excluding cash, bank, and fictitious assets, are closed at book values, with sundry debtors transferred at gross value, and provision for doubtful debts transferred to credit.

Realisation A/c Dr. To Assets (Individually) A/c

2. For transfer of liabilities: All external liability accounts including provisions, if any, are closed by transferring them to the credit of Realisation account.

Liabilities (individually) Dr. To Realisation A/c 

3. For the sale of assets 

Bank A/c Dr.{with the same value} To Realisation A/c 

4. For an asset taken over by a partner 

Partner’s Capital A/c Dr.{with the amount assets are taken over} To Realisation A/c

 5. For payment of liabilities 

Realisation A/c Dr. {with the amount at which settled} To Bank A/c

6. For a liability in which a partner takes responsibility to discharge 

Ralisation A/c Dr. To Partner’s Capital A/c

7. When a creditor settles their account through asset transfer, no journal entry is needed. However, if the creditor accepts an asset as part of payment, the entry is made for cash payment, like if a debtor pays Rs. 2,000 in cash.

Realisation A/c Dr. To Bank A/c

However, when a creditor accepts an asset whose value is more than the due amount he/she pay cash to the firm for the difference for which the entry will be: Bank A/c Dr. To Realisation A/c

8. For payment of realisation expenses 

(a) When some expenses are incurred and paid by the firm in the process of realisation of assets and payment of liabilities: Realisation A/c Dr. To Bank A/c 

(b) When realisation expenses are paid by a partner on behalf of the firm: Realisation A/c Dr. To Partner’s Capital A/c 

(c) When a partner has agreed to bear the realisation expenses: 

(i) if payment of realisation expenses is made by the firm Partner’s Capital A/c Dr. To Bank A/c 

(ii) if the partner himself pays the realisation expenses, no entry is required

Note: In the absence of information about who is paying the expenses, it is implied that expenses are paid by the partner who has agreed to bear expenses.

9. For agreed remuneration to such partner who agrees to undertake the dissolution work. Realisation A/c Dr. To Partner’s Capital A/c 

10. For realisation of any unrecorded assets including goodwill, if any 

Bank A/c Dr. To Realisation A/c

11. For settlement of any unrecorded liability 

Realisation A/c Dr. To Bank A/c 

12. For transfer of profit and loss on realisation (Cr. Balance) 

(a) In case of profit on realisation Realisation A/c Dr. To Partners’ Capital A/c (individually) A/c (b) In case of loss on realisation Partners’ Capital A/c (individually) Dr. (Dr. Balance) To Realisation A/c 

13. For settlement of loan by a firm to a partner: 

Bank A/c Dr. To loan to partners A/c  

14. For transfer of accumulated profits in the form of general reserve to partners’ capital accounts in their profit sharing ratio: 

General Reserve A/c Dr. To Partners’ Capital A/c (individually) 

15. For transfer of fictitious assets, if any, to partners’ capital accounts in their profit sharing ratio: 

Partners’ Capital A/c (individually) Dr. To Fictitious Asset A/c 

16. For payment of loans due to partners

 Partner’s Loan A/c Dr. To Bank A/c 

17. For settlement of partners’ accounts If the partner’s capital account shows a debit balance after posting of rebount entries firms. He brings in the necessary cash for which the entry will be: 

Bank A/c Dr. To Partner’s Capital A/c 

18. The balance is paid to partners whose capital accounts show a credit balance and the following entry is recorded. 

Partners’ Capitals A/cs (individually) Dr. To Bank A/c

5 Important Topics of Class 12 Accountancy Chapter 4 you shouldn’t Miss!

Importance of Revision Class 12 Chapter 4 Dissolution of Partnership Firm Revision Notes

• Revision Notes for Dissolution of Partnership Firm Class 12 Notes provides a concise chapter summary, making it easier to review important concepts quickly.

• Revision notes highlight the key points and important information frequently asked in exams.

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Tips for Learning the Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm

• To improve your understanding and application skills, practising solving different problems and exercises from your textbook and reference books is important. 

• Regularly revise the chapter to reinforce your understanding and prepare effectively for exams.

• Creating summary charts or tables can help you quickly revise concepts, formulas, and journal entries. 

• Additionally, reviewing previous years' question papers can provide insight into the types of questions asked and the marking scheme.

• Use online resources provided by Vedantu, such as educational videos, interactive quizzes, And practice tests to reinforce your learning.

Conclusion

Dissolution of Partnership Firm Class 12 Notes is important for understanding the procedures and accounting treatments involved when a partnership firm is dissolved. Key topics such as the realisation of assets, settlement of liabilities, distribution of remaining assets among partners, and preparation of the necessary financial statements are essential for accurate financial reporting and fair distribution among partners.

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