1 of 14

DISSOLUTION OF PARTNERSHIP FIRM

PREPARED BY: SMT.SHAKUNTALA PUJAR, PGT COMMERCE,

JNV KOPPAL

2 of 14

DISSOLUTION OF �PARTNERSHIP FIRM

​

  • INTRODUCTION: Dissolution means breaking up i.e., discontinuance of existing relationship among the partners. Under the Indian partnership act 1932, the dissolution may be either of partnership or of a firm.
  • DISSOLUTION OF PARTNERSHIP

The dissolution of partnership may take place in any of the following ways.

​

1) Change in existing profit sharing ratio among partners.

2) Admission of a new partner

3) Retirement of a partner

4) Death of a partner etc.

3 of 14

���� DISSOLUTION OF A FIRM

Dissolution of a firm takes place in any of the following ways.

1) Dissolution by agreement

a) With the consent of all the partners

b) In accordance with a contract between the partners

2) Compulsory Dissolution

a) When all the partners or all but one partner, become insolvent, rendering them in competent to sign a contract

b) When the business of the firm becomes illegal.

3) On the happening of certain contingencies

a) If constituted for a fixed term, by the expiry of that term

b) By the death of a partner.

4 of 14

4) Dissolution by notice: In case of partnership at will the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, signifying his intension of seeking dissolution of the firm.

5) Dissolution by court:

a) When a partner becomes insane

b) When a partner becomes permanently in capable of performing his duties as a partner.

​

​

Basis

Dissolution of partnership

Dissolution of Firm

1.Termination of business

The business is not terminated

The business of the firm is closed

2.Settlement o assets and liabilities

Assets and liabilities are revalued and new balance sheet is drawn.

Assets are sold and liabilities are paid-off.

3.Court's intervention

Court does not intervene because partnership is dissolved by mutual agreement

A firm can be dissolved by the court's order

4.Economic

relationship

Economic relationship between the partners continues through in a changed form

Economic relationship between the partners comes to an end

5.Closure of books

Does not require because the business is not terminated

The books of account are closed

DIFFERENCE BETWEEN DISSOLUTION OF PARTNERSHIP & DISSOLUTION OF FIRM

5 of 14

� SETTLEMENT OF ACCOUNTS

Section 48 of the partnership act 1932 shall apply,

1) TREATMENT OF LOSSES

a) First out of profits

​

b) Next out of capital of partners and

​

c) Lastly, if necessary, by the partners individually in their profit sharing ratio

2) APPLICATION OF ASSETS

  • In paying the debts of the firm to the third parties
  • In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital i.e., partner loan
  • In paying to each partner proportionately what is due to him on account of capital and
  • The residue, if any, shall we divided among the partners in their sharing ratio.

​

6 of 14

� PRIVATE DEBTS AND FIRMS DEBTS

  • The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall we divided among the partners as per their claims, which can be utilized for the payment of their private liabilities

​

  • The private property of any partner shall we applied first in the payment of his private debts and the surplus, if any, may be utilized for payment of the firms debts, in case the firms liabilities exceed the firm’s assets.

​

  • NOTE: It may be noted the private property of the partner does not include the personal properties of his wife and children.

​

7 of 14

�� ACCOUNTING TREATMENT

Realisation Account Partners Capital Account Bank Account

8 of 14

  • Problem 1: Ankit Bobby and Kartik were partners in a firm sharing profits in the ratio of 4:3:3. The firm was dissolved on 31st March, 2018. Pass the necessary journal entries for the following transactions after various assets and third party liabilities had been transferred to realisation account .
  • The firm had stock of Rs.80000. Ankit took over 50% of the stock at a discount of 20% while the remaining stock was sold of at a profit of 30% on cost.
  • A liability under suit for damages in included in creditors was settled at Rs.32000 as against only Rs.13000 provided in the books. Total creditors of the firm were 50000.
  • Bobby’s sister’s loan of Rs.20000 was paid of along with interest of Rs.2000
  • Kartik’s loan of Rs.12000 was settled at Rs.12500

​

9 of 14

10 of 14

  • PROBLEM – 2 : Srijan, Raman and Manan were partners in a firm sharing profits and losses in the ratio of 2:2:1. On 31st March, 2017 ther Balance Sheet was as follows:
  • Balance Sheet of Srijan, Raman and Manan as on 13.03.2017

​

11 of 14

  • On the above date they decided to dissolve the firm:

Srijan was appointed to realise the assets and discharge the liabilities. Srijan was to receive 5% commission on sake of assets (except cash) and was to bear all the expenses of realization.

Investments were realised as follows: (Rs.)

  • Plant 85,000
  • Stock 33,000
  • Debtors 47,000

​

  • Investments were realized at 95% of the book value.
  • The firm had to pay Rs.7500 for an outstanding repair bill not provided for earlier.
  • A contingent liability in respect of bills receivable, discounted with the bank had also materialized and had to be discharged for Rs.15,000.
  • Expenses of realization amounting to Rs.3000 were paid by Srijan.
  • Prepare Ralisation Account, Partners’ Capital Accounts and Bank Account.

​

12 of 14

SOLUTION:

REALISATION ACCOUNT

​

IMPROTANT: There is no entry for realization expenses of Rs.3000 paid by Srijan, since he will bear all such expenses.

​

13 of 14

14 of 14

THANK YOU