ADVANCED ACCOUNTING 2.

Partnership Accounts

2. PARTNERSHIP ACCOUNTS Accounts

UNIT 1 - DISSOLUTION OF PARTNERSHIP FIRMS

 An Overview :
1) Dissolution
2) Piecemeal Distribution
3) Conversion into a Firm
4) Conversion into Company
5) Sale to a Company
6) Amalgamation of Firm
7) Garner vs. Murray Rule
8) LLP

CONCEPT 1 : DISSOLUTION
 When partner decides to dissolve the firm :
a) All its assets are realised (converted into cash)
b) Firms liabilities are settled
c) Partner's Capital Accounts are settled
 In case of Insolvency

Partnership Act 1932, does not provide how deficiency is to be adjusted

Hence, it will be done

a) By mutual agreement between the partners
b) In Profit Sharing Ratio or Loss Sharing Ratio (if they decide)
c) Garner Vs. Murray Rule

CONCEPT 2 : DISSOLUTION– GENERAL

 Question : W paid premium to other partners of the firm at the time of his admission with the term or
condition that the Firm will not be dissolved before expiry of 5 years. The firm is dissolved after 3
years. W claims refund of premium :
a) List the criteria for the calculation of amount of refund.
b) Also list any condition when no claim in this respect will arise.
 Answer :
a) Criteria for calculation of refund :
 Terms of admission
 Time period for which it was agreed that the firm will not be dissolved
 Time period for which firm has already been in existence
𝐔𝐧𝐞𝐱𝐩𝐢𝐫𝐞𝐝 𝐏𝐞𝐫𝐢𝐨𝐝 𝟐 𝐲𝐞𝐚𝐫𝐬
Amount to be refunded = Premium Amount * 𝐓𝐨𝐭𝐚𝐥 𝐀𝐠𝐫𝐞𝐞𝐝 𝐏𝐞𝐫𝐢𝐨𝐝 = Premium Amount * 𝟓 𝐲𝐞𝐚𝐫𝐬

b) No refund in case of :
i) Dissolution on account of death of a partner
ii) Dissolution on account of misconduct of a Partner (W)
iii) No refund is agreed in the terms of Partnership

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 ADVANCED ACCOUNTING 2. Partnership Accounts
 Order of Payment :
a) Third Party Liability Accounts
b) Advance or Loan of a Partner
c) Surplus if any Divided in PSR
 Note : Before payment of Capital (Step 3) Surplus/Deficit is adjusted in Partner's Capital A/c So that
the exact cash balance of Capital will be payable to the Partners
 Entries for Dissolution [Objective is to make the balance in books of accounts zero] :
Sr. No. Particulars ` `
1) All Assets except Cash & Bank Balance are transferred to Realisation A/c
Realisation A/c Dr
To Assets
2) 3rd party liabilities transfer to Realisation A/c
Third Party Liability A/c Dr
To Realisation A/c
3) Assets sold
Cash/ Bank A/c (Realisable Value) Dr
To Realisation A/c
4) Asset taken over by partner
Partner's Capital A/c Dr
To Realisation A/c
5) Payment of Liability
Realisation A/c Dr
To Cash/Bank A/c
6) Liability taken over by Partner
Realisation A/c Dr
To Partner's Capital A/c
7) Realisation Expenses Paid
Realisation A/c Dr
To Cash/Bank A/c
8) Advanced from Partner paid (Second party liability)
Partner's Advance A/c Dr
To Cash/Bank A/c
9) Realisation A/c is closed
a) In case of loss to be transferred
Partner's Capital A/c Dr
To Realisation A/c
b) In case of Profit to be transferred
Realisation A/c Dr
To Partner's Capital A/c
10) Capital A/c is closed
Partner's Capital A/c Dr
To Cash/Bank A/c
[Cross Tally : Cash/ Bank A/c gets tallied]

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 ADVANCED ACCOUNTING 2. Partnership Accounts

CONCEPT 3 : SOME IMPORTANT POINTS

Accounts
1) Realisation of

Tangible Asset Intangible Asset

If amount is not given Assume no Value/ Nil Value

then assume Book Value

2) Settlement of Liability - If not given assume Book Value is paid.

 How to solve Problem ?
Step I : Open

Compulsory A/cs Not Compulsory A/cs

a) Realisation A/c a) Third Party Liability A/c

b) Bank A/c b) Creditors A/c
c) Partner's Capital A/c c) Patents A/c
d) Partner's Advance A/c
(if given)
e) Partner's Loan A/c
(2nd Party)
Do not transfer to Realisation A/c
− Step II : Write down Opening Balances which are given
− Step III : Transfer all Balance Sheet items i.e. Assets & 3rd Party Liability to Realisation A/c [only 1
effect]
− Step IV : Read adjustments & give 2 effects accordingly
 Notes :
(a) Remember Partner's Capital A/c is debited then firm will receive from partner & if credited then firm
has to pay to partner
(b) If there is Realisation Loss pass Notional Entry

CONCEPT 4 : MEANING
 Assets sold on Dissolution are realised only in Small Installments
Partners want amount to be distributed as & when it is realized. It is known as "Piecemeal Distribution"
CONCEPT 5 : HOW TO UTILISE THE INSTALLMENT RECEIVED ?
 First pay third party liability according to secured/unsecured nature
 Pay second party liability (e.g. loan from partner)
 Pay first party liability (i.e. Capital A/c)
 Note : At the time of payment; realisation is not yet complete. So, we don't know the actual loss on
realisation but distribute the amount in such a way that balance left in capital account should be in
the ratio of PSR.

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 ADVANCED ACCOUNTING 2. Partnership Accounts

CONCEPT 6 : METHOD OF PIECEMEAL DISTRIBUTION

Accounts

Maximum Loss Method Highest Relative Capital/

Adjusted Capital/
Proportionate Capital/
Each installment is
considered to be the Final Absolute Surplus Method
Payment & no further
payment will be received
Partner who is greater in proportion
to his PSR will be paid first
(3 tables)

Surplus table
Cash distribution
Payment Slab

CONCEPT 7 : FORMAT OF MAXIMUM LOSS METHOD [BY SS WAY]

☺ E.g. Partner's A,B,C, : PSR : 2:2:1,
Balances in Capital Account are 30,000, 25,000, & 45,000 respectively.
All third party liabilities are paid & Balance in Bank A/c.
First Installment = 10,000
Second Installment = 50,000
Final Installment = 10,000
Statement showing Realisation & distribution of Cash Payments
Sr. No Particulars Bank Capital A/c
Balance A B C
A) Opening Balances 30,000 25,000 45,000
B) First Installment Received 10,000
Less: paid to capital accounts (A-B) -10,000 6,000 11,000 -27,000
(3) (3) (3)
Receivable Receivable Payable
C) Maximum Loss in PSR 2:2:1 (1) 90,000 36,000 36,000 18,000
(30,000+25,000+45,000-10,000) (2) (2) (2)
D) Deficiency of A & B trf to C -6,000 -11,000 17,000
E) Balance (C-D) 30,000 25,000 35,000
F) Second Installment Received 50,000
Less : Paid to Capital accounts * (E-F) -50,000 -14,000 -9,000 -27,000
(3) (3) (3)
Payable Payable Payable
G) Max Loss in PSR 2:2:1 (1) 16,000 16,000 8,000
(30,000+25,000+35,000-50,000) (2) (2) (2)
H) Final Installment Received 10,000
Less: Paid to Capital accounts *(G-H) -10,000 -4,000 -4,000 -2,000
(3) (3) (3)
Payable Payable Payable

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 ADVANCED ACCOUNTING 2. Partnership Accounts

12,000 12,000 6,000

i) Max Loss in PSR 2:2:1 (1) Accounts
(16,000+16,000+8,000-10,000)

CONCEPT 8 : FORMAT OF HIGHEST RELATIVE CAPITAL METHOD

Calculation of Highest Relative Capital Basis
Sr. No Particulars A B C
A) Balance in Capital A/c 30,000 25,000 45,000
B) Balance 30,000 25,000 45,000
C) PSR 2 2 1
D) Capital PSR (A/B) 15,000 12,500 45,000
E) Taking B's cap as base (12,500*C) 25,000 25,000 12,500
F) Balance (B-E) 5,000 0 32,500
G) PSR 2 2 1
H) Capital PSR (F/G) 2,500 32,500
I) Taking A's cap as base (2,500*G) 5,000 2,500
J) Balance (F-l) 30,000
Statement showing distribution of Cash
Sr. No Particulars Bank Capital A/cs
Balance A B C
A) Balance Due 30,000 25,000 45,000
B) First Installment
Amt Received 10,000
Less : Paid to C * -10,000 -10,000
C) Balance (A-B) 30,000 25,000 35,000
D) Second Installment 50,000
Less : Paid to C -20,000 -20,000
Less : Paid to A&C -7,500 -5,000 -2,500
Less : Paid to A,B,C in PSR -22,500 -9,000 -9,000 -4,500
E) Balance (C-D) 16,000 16,000 8,000
F) Third Installment
Amt Received 10,000
Less : Paid to A, B & C -10,000 -4,000 -4,000 -2,000
G) Realisation Loss/ (profit) 12,000 12,000 6,000
 Cross Tally : Final answer should be in the ratio of 2:2:1
Payment Slab
Sr. No Particulars A B C
A) Payment towards C 30,000
Less : 1st Installment -10,000
Less : 2nd Installment -20,000
B) Payment towards A&C 5,000 2,500
Less : 2nd Installment -5,000 -2,500
C) Payment towards A, B & C 25,000 25,000 12,500
Less : 2nd Installment -9,000 -9,000 -4,500
Less : 3rd Installment -4,000 -4,000 -2,000
D) Total 12,000 12,000 6,000

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 ADVANCED ACCOUNTING 2. Partnership Accounts

CONCEPT 9 : CIRCUMSTANCES LEADING TO DISSOLUTION OF PARTNERSHIP

Accounts
 A partnership is dissolved or comes to an end on :
(a) The expiry of the term or the completion of the venture for which it was formed;
(b) Death of a partner;
(c) Insolvency of a partner;
(d) Retirement of a partner;
 A firm stands dissolved in the following cases :
(a) The partners agree that the firm should be dissolved;
(b) All partners except one become insolvent;
(c) The business becomes illegal;
(d) In case of partnership at will, a partner gives notice of dissolution; and
(e) The court orders dissolution.
 The court has the option to order dissolution of a firm in the following circumstances :
(a) Where a partner has become of unsound mind;
(b) Where a partner suffers from permanent incapacity;
(c) Where a partner is guilty of misconduct of the business;
(d) Where a partner persistently disregards the partnership agreement;
(e) Where a partner transfers his interest or share to a third party;
(f) Where the business cannot be carried on except at a loss; and
(g) Where it appears to be just and equitable.

CONCEPT 10 : LOSS ARISING FROM INSOLVENCY OF A PARTNER

 Meaning of Garner vs. Murray Rule :
 When a partner is unable to pay his debt due to the firm, he is said to be insolvent and the share of loss
is to be borne by other solvent partners in accordance with the decision in the English case of Garner
vs. Murray.
 According to this decision, solvent partners have to bear the loss due to insolvency of a partner and
have to categorically put that the normal loss on realisation of assets to be borne by all partners
(including insolvent partner) in the profit sharing ratio but a loss due to insolvency of a partner has to
be borne by the solvent partners in the capital ratio.
 Non-applicability of Garner vs. Murray Rule :
 When the solvent partner has debit balance in the capital account.
 When the firm has only two partners.
 When there is an agreement between the partners to share the deficiency in capital account of
insolvent partner.
 When all partners of the firm are insolvent.

CONCEPT 11 : CAPITAL RATIO ON INSOLVENCY

 The partners are free to have either fixed or fluctuating capitals in the firm.
 If they are maintaining fixed capitals, then all adjustments are done through Current Accounts, which
may have debit or credit balances and insolvency loss is distributed in the ratio of fixed capitals.
 If they are maintaining fluctuating capitals, all transactions are passed through Capital Accounts then
Balance Sheet of the business shall not exhibit Current Accounts of the partners and capital ratio will
be determined after adjusting all the reserves and accumulated profits, drawings, interest on capitals
and on drawings to the date of dissolution but before adjusting profit or loss on Realisation Account.
 Solvent partner having debit balance in his Capital Account then he cannot be called upon to bear loss
on account of the insolvency of other partner.

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 ADVANCED ACCOUNTING 2. Partnership Accounts

CONCEPT 12 : INSOLVENCY OF ALL PARTNERS

Accounts
 When the liabilities of the firm cannot be paid in full out of the firm's assets as well as personal assets
of the partners, then all the partners of the firm are said to be insolvent. Under such circumstances,
the amount of creditors is not transferred to realization account.
 Creditors are paid out of the amount available.
 The unsatisfied portion of creditor account is transferred to Capital Accounts of the partners in the
profit sharing ratio. Then Capital Accounts are closed. In doing so first close the Partners' Capital
Account. The last account will be automatically closed.

CONCEPT 13 : LIMITATION OF LIABILITY OF AN LLP AND ITS PARTNERS

 Under section 27 (3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or
otherwise, shall be solely the obligation of the LLP;
 The partners of the LLP under normal course of business are not liable for the debts of LLP;
 The Liabilities of an LLP shall be met out of the properties of the LLP;
 Under section 28 (1) a partner is liable for his own wrongful acts or commissions, but shall not be
liable for the wrongful acts or commissions of other partners of LLP, where wrongful acts include acts
of fraud and willful omissions.
 Hence, the liability may fall only on that partner, who is guilty of any wrongful acts or commissions in
respect of debts or liabilities acquired by such acts.

CONCEPT 14 : WINDING UP AND DISSOLUTION OF LLP

 Under LLP Act, 2008 an LLP may be wound up voluntarily or by the Tribunal.
 Under section 64,LLP may be wound up by the Tribunal:
 If the LLP decides that it should be wound up by the Tribunal;
 If for a period of more than six months, the number of partners of the LLP is reduced below two;
 If the LLP is unable to pay its debts;
 If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the
state or public order;
 If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar
for five consecutive financial years;
 If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.



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