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DISSOLUTION OF PARTNERSHIP

NIKET

UNIT 3 DISSOLUTION OF PARTNERSHIP FIRM

INTRODUCTION When the business of the fir is !"ose# #o$n an# the re"ation of %artners !o es to an en#& the fir is sai# to ha'e been #isso"'e#( There is a #istin!tion bet$een the #isso"ution of %artnershi% an# #isso"ution of fir ( When one or ore %artners se'er their !onne!tions $ith the fir but the re aining %artners !ontinue to !arr) on business& it is the #isso"ution of %artnershi%( *ut $hen there is a !o %"ete brea+#o$n of re"ations a ong a"" the %artners an# the business is !"ose# #o$n& it is ter e# as #isso"ution "f the fir & in this !ha%ter, $e sha"" #ea" $ith a!!ounts of the re"ationshi% $hen the fir is #isso"'e#( DISSOLUTION OF PARTNERSHIP AND FIRM: At this stage& "et us a+e !"ear the eaning of -Disso"ution of fir . an# -Disso"ution of Partnershi%.( A!!or#ing to Se!tion /0 of the In#ian %artnershi% A!t& -The #isso"ution of Partnershi% bet$een a"" the %artners of a fir is !a""e# the #isso"ution of fir (. Thus #isso"ution of the fir eans the !o %"ete an# tota" !essation of "ega" re"ations a ongst a"" %artners in #isso"ution of fir s& the business of %artnershi% is !"ose# an# after %a) ent of a"" "iabi"ities& the !a%ita" is returne# to %artners( *ut in !ase of retire ent& #eath or inso"'en!) of a %artner& if the re aining %artners !ontinue the o"# business of the fir & there is #isso"ution of %artnershi%( In this !ase the fir is not #isso"'e# but& on") fir is re1!onstitute#& In short& #isso"ution of %artnershi% #oes not ne!essari") in'o"'e the #isso"ution of fir but #isso"ution of fir is ne!essar) in'o"'es #isso"ution of %artnershi%( CIRCUMSTANCES OF DISSOLUTION: The #isso"ution of %artnershi% ta+es %"a!e un#er the fo""o$ing !ir!u stan!es( a2 When the fir $as !onstitute# for a fi3e# ter & on the e3%ir) of that ter (

b2 On the !o %"etion of %arti!u"ar 'enture& if !onstitute# for a %ur%ose( !2 On the #eath of a %artner( #2 On the inso"'en!) of a %artner( e2 On the retire ent of a %artner( A fir is #isso"'e# un#er the fo""o$ing !ir!u stan!es4

512 When a"" the %artners agree to #isso"'e the fir ( 562 When a"" the %artners of a"" %artners e3!e%t one are #e!"are# inso"'ent( 5/2 When a"" business of the fir be!o es un"a$fu"(

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DISSOLUTION OF PARTNERSHIP

NIKET

572 When the %artnershi% is at $i""& on an) %artner gi'ing noti!e in $riting to a"" the other %artners of his intention to #isso"'e the fir ( 582 When the !ourt or#ers the #isso"ution of the fir (

Un#er the fo""o$ing !ir!u stan!es& the !ourt $i"" or#er the #isso"ution of the fir ( 5a2 When a %artner be!o es of unsoun# in#(

5b2 When a %artner has be!o e %er anent") in!a%ab"e of %erfor ing #uties 5!2 When a %artner is gui"t) of is!on#u!t $hi!h is "i+e") to affe!t business( its brea!h of %artnershi% agree ent to a thir# %art)

5#2 When a %artner %ersistent") !o

5e2 When a %artner has transferre# $ho"e of his interest in the fir 5f2 When the business !annot be !arrie# on e3!e%t at a "oss(

5g2 On an) other groun# $hi!h a%%ears to the !ourt 9ust an# e:uitab"e( MODE OF SETTLEMENT OF ACCOUNTS: When a fir is #isso"'e#& the assets are so"# off an# out of the %ro!ee#s the "iabi"ities of the fir are %ai# off& then the sur%"us is a%%"ie# in %a) ent of %artner;s "oan& if an)( Fina"")& the !a%ita" of the %artners is returne#( When there is an agree ent a ong the %artners as to the $a) in $hi!h the a!!ounts are to be sett"e#& the a!!ounts shou"# be sett"e# a!!or#ing")( If there is not su!h agree ent& the %ro'ision of se!( 7< of the In#ian Partnershi% A!t& 10/6 a%%"ies( The sai# %ro'isions are as fo""o$s4 In sett"ing the a!!ounts of a fir after #isso"ution& the fo""o$ing ru"es sha"" be obser'e#& sub9e!t to agree ent b) the %artners4 a2 Losses in!"u#ing #efi!ien!ies of !a%ita" sha"" be %ai# first out off %rofits& ne3t out of !a%ita" an# "ast")& if ne!essar) b) the %artners in#i'i#ua"") in the %ro%ortion in $hi!h the) $ere entit"e# to share %rofits( b2 The assets of the fir & in!"u#ing an) su s !ontribute# b) the %artners to a+e u% #efi!ien!ies of !a%ita"& sha"" be a%%"ie# in the fo""o$ing anner an# or#er4 12 In the %a)ing the #ebts of the fir to thir# %arties( fro the fir for a#'an!es as

62 In %a)ing to ea!h %artner ratab") $hat is #ue to hi #istinguishe# fro !a%ita"( /2 In %a)ing to ea!h %artner ratab") $hat is #ue hi

on a!!ount of !a%ita"& an#

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DISSOLUTION OF PARTNERSHIP

NIKET

72 The resi#ue& if an)& sha"" be #i'i#e# a ong the %artners in the %ro%ortion in $hi!h the) $ere entit"e# to share %oint( STEPS TO BE TAKEN ON DISSOLUTION: The abo'e %ro'isions of the %artnershi% A!t suggest the fo""o$ing ste%s to be ta+en on #isso"ution of the fir ( 12 A"" the assets of the fir & in!"u#ing goo#$i"" are so"# or #is%ose# off in an) other $a) 5E(g( a %artner a) ta+e o'er an asset2 62 The a ount so rea"i=e# is a%%"ie# in %a)ing off thir# %art) "iabi"ities in the first ba"an!e( /2 If an) one or ore %artners ha'e a#'an!e# "oan to the fir in a##ition to his !a%ita"& then these "oan are re%ai# ne3t after re%a) ent of thir# %art) "iabi"ities( 72 No$& %artners $i"" ne %ai# $hat is #ue to the on !a%ita" a!!ounts( If the sur%"us is not enough to return the fu"" a ount of !a%ita"& then the %artner are %ai# ratab") 82 Sur%"us& if an)& "eft after returning !a%ita"s is %ai# to the %artners in their %rofit sharing ratio( Firm debts a d !ri"ate Debts: The "iabi"it) of %artners is un"i ite#& in the sense that the %ri'ate %ro%ert) of the %artners !an a"so be uti"i=e# for %a) ent of ri ;s #ebts( *ut& a!!or#ing to %artnershi% A!t& %ri'ate %ro%ert) of an) %artner ust be uti"i=e# first in %a) ent of %artner;s %ri'ate #ebts( Si i"ar")& fir ;s assets are first a%%"ie# in %a) ent of fir ;s #ebts an# if there is an) sur%"us& then the share of a %artner in the sai# sur%"us !an be uti"i=e# in %a) ent of the %ri'ate #ebts(

ENTRIES ON DISSOLUTION RELI#ATION ACCOINT: On #isso"ution of a fir & boo+s of a!!ount are !"ose#( For this %ur%ose a"" assets of the fir are #is%ose# off an# "iabi"ities %ai# off( For !"osing the a!!ount of assets an# "iabi"ities& the >Rea"i=ation A!!ount; is o%ene#( A"" the assets an# "iabi"ities are transferre# to this a!!ount( In !ase of a# ission or retire ent of a %artner& Profit an# "oss a!!ount is o%ene# to re!or# the in!rease an# #e!rease in the 'a"ue of asset an# "iabi"ities( Rea"i=ation a!!ount is not ne!essar) in this !ase as the business is to !ontinue an# assets are not to be #is%ose# off( The boo+ 'a"ues of assets an# "iabi"ities are transferre# to rea"i=ation

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DISSOLUTION OF PARTNERSHIP

NIKET

a!!ount& as these a!!ounts are to be !"ose#( Assets ha'e #ebit ba"an!es& hen!e the) are !re#ite# in or#er to !"ose those a!!ount an# are sho$n on #ebit si#e of rea"i=ation a!!ount( Si i"ar")& "iabi"ities ha'e !re#it ba"an!es an# the) are #ebite# to !"ose the an# are transferre# to the !re#it of rea"i=ation a!!ount( ENTERIES ON DISSOLUTION TRANSA?TION 1( 6( /( 7( 8( ?"osing a!!ount of assets ?"osing a!!ount "iabi"ities On sa"e of assets On %a) ents of "iabi"ities On %a) ent of #isso"ution e3%( A( Distributing rea"i=ation %rofit B( On %a) ent of %artner;s "oan <( Distributing Cenera" Reser'e 0( Sett"ing %artners ?a%(5Dr(2 1D( Returning !a%ita"s to %artners A@? TO *E DE*ITED Rea"i=ation A@! Dr Liabi"ities A@! Dr ?ash@*an+ A@! Dr Rea"i=ation A@! Dr Rea"i=ation A@! Dr Rea"i=ation A@! Dr Partner;s "oan A@! Dr Cenera" reser'e A@! Dr ?ash@*an+ A@! Dr Partner;s !a%ita" A@! Dr A@? TO *E ?REDITED Assets A@! ?r( Rea"i=ation A@! ?r( Rea"i=ation A@! ?r( ?ash@*an+ A@! ?r( ?ash@ban+ A@! ?r( Partner;s ?a%ita" A@! ?r( ?ash@*an+ A@! ?r( Partner;s !a%ita" A@! ?r( Partner;s !a%ita" A@! ?r( ?ash@*an+ A@! ?r(

Re e ber that $hi"e so"'ing the e3a %"e( A"" the ba"an!e gi'en in the *@s transferre# to fo""o$ing four a!!ounts( 12 Rea"i=ation a!!ount 62 Partner;s !a%ita" a!!ount /2 ?ash@*an+ A!!ount 72 Partner;s Loan A@! 5if an)2

ust be

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DISSOLUTION OF PARTNERSHIP

NIKET

REALI#ATION ACCOUNT PARTICULAR To sun#r) assets 5Entr) no(12 E( Lan# an# bui"#ing E( P"ant an# a!hiner) E( Sto!+ E( Debtors To ?ash@*an+ Pa) ent of "iabi"ities E( 5Entr) no 7A2 E( ?re#itors E( *i""s %a)ab"e E( ?ontingent "iabi"ities( To %artner;s ?a%ita" A@! Liabi"ities ta+en o'er 5entr) no( 7*2 To !ash A!!ount Disso"ution e3%s( E(( 5entr) no 82 To ba"an!e being %rofit transferre# to %artner;s !a%ita" A@! 5Entr) no( AA2 EEEEE ((((((((((((((((((((((( ( Rs$ PARTICULAR *) sun#r) "iabi"ities 5entr) 62 ?re#itors E( *i""s %a)ab"e E( *an+ #rafts E( *) ?ash@*an+ Sa"es %ro!ee#s of Assets 5Entr) 72 Lan# an# bui"#ing E( P"ant an# a!hiner)E( *) Partners ?a%ita" A!!ount Assets ta+en o'er E( 5Entr) No(/*2 *) *a"an!e being "oss transfor e# to %artners !a%ita" a!!ount 5entr) no(A*2 Rs$

EEEE((

(((((((((((((

EEEEE(

EEEEE EE(

EEEEE(

EEEEE

EEEEE

Cenera"") the e3%enses are %ai# b) the fir ( The sa e is #ebite# to rea"i=ation a!!ount an# !re#ite# to ?ash A!!ount 12 At ti es& one of the %artners a) agree to bear the e3%enses( In su!h !ase& if the fir %a)s the e3%enses& it shou"# be #ebite# to !a%ita" a!!ount of the sai# %artner an# not to the rea"i=ation a!!ount, the !orres%on#ing !re#it being gi'en to !ash A!!ount( 62 If the %artner un#erta+es to bear the e3%enses( An# $hen he %a)s the e3%enses& there shou"# be no entr) in the fir ;s boo+s(

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DISSOLUTION OF PARTNERSHIP

NIKET

/2 It a) be agree# u%on a ong the %artners that one of the $i"" be %ai# a fi3e# re uneration for atten#ing to the #isso"ution $or+& but he is re:uire# to bear the #isso"ution e3%enses( In su!h a !ir!u stan!e& the fi3e# re uneration is #ebite# to Rea"i=ation A!!ount an# !re#ite# to his ?a%ita" a!!ount( No entr) is a#e in the fir ;s boo+ $hen he 5%artner2 %a)s the rea"i=ation e3%enses( %OOD &ILL ON DISSOLUTION: Treat ent of goo#$i"" is si i"ar to that of other assets on #isso"ution 12 When goo#$i"" a%%ears in the *@s on the #ate of #isso"ution& it shou"# be transferre# to the #ebit si#e of rea"i=ation a!!ount( An) A ount rea"i=e# on sa"e of goo#$i"" shou"# then be !re#ite# of rea"i=ation a!!ount "i+e an) other asset( If nothing is rea"i=e#& fro goo#$i"", natura"") no entr) is a#e in the rea"i=ation A!!ount for its rea"i=ation( 62 If goo#$i"" #oes not a%%ear in the boo+s& the :uestion of transferring to the #ebit si#e of rea"i=ation a!!ount #oes not arise( When so e thing is rea"i=e# on sa"e of unre!or#e# goo#$i""& it shou"# be !re#ite# to Rea"i=ation a!!ount $hi!h is u"ti ate") transferre# to the !re#it si#e of the %artner;s ?a%ita" A!!ounts( Thus& %artners get the benefit of goo#$i""(