DISSOLUTION OF PARTNERSHIP FIRM

In all previous chapter i.e Change in PSR , Admission , Retirement their was "dissolution of partnership" only .
Only old PSR agreement was cancelled and new agreement was enforced without disturbing continuity of business

Now in this chapter we will discuss " Dissolution of Partnership Firm " which means their will be end of agreement
as well as end of business (firm) also

Modes of Dissolution
Part (i) Dissolution without the order of Court: The business will be closed in following situation
Case I : Dissolution by agreement
Case ii : Compulsory Dissolution when a) Partners are insolvent b) business becoming illegal
Case iii: On happening of certain event a) Expiry of term b) completion of project c) death of partner
Case iv: when partnership is at will . Any partner can wind up business by serving Notice to other partner

Part (ii) Dissolution by Court : Court can order winding up of business in any of the following situation
Case i) If any of the partner becomes a person of unsound mind
Case ii) If partner becomes incapable to perform duties of business
Case iii) when any partner continously breaches the terms & Condition of Partnership deed/ Guilty of misconduct
Case iv) If business is in continous loss without any hope for recovery
Case v) any other equitable grounds court deems fit

Liability will be paid off Assets

sold
i) Secured Creditors (Liquidator will collect money)
ii) Unsecured Creditors
iii) Partner's Loan
Iv) Partner's Capital

Note : Any surplus left after distribution will be divided to partners only in PSR

ACCOUNTING CONCEPT OF DISSOLUTION

One special account known as REALISATION a/c is prepared

Step 1: We will transfer all Real Assets appearing in given B/s to Realisation Account at Book Value

Realisation A/c Dr
To Various Assets(Name ) BV
(being assets appearing in B/s transferred)

Note : Generally all items appearing on asset side of B/s will be transferred except the following :
i) Cash & Bank -separate a/c
ii) Capital / Current A/c (Debit Balance)
iii) Loan to Partner
iv) Profit & Loss / Advertisemnet Suspense Etc

Step 2: We will transfer all external liabilities appearing in given B/s to Realisation Account at Book Value

Various Liability (Name) A/c Dr

To Realisation A/c
(being liabilities appearing in B/s transferred)

Note : Generally all items appearing on liability side of B/s will be transferred except the following :
i) Bank OD
ii) Capital / Current A/c
 iii) Loan from Partner
iv) Profit & Loss / General Reserve / Workmen compensation reserve (If Idle and no liabilty exist against it)
(Any reserve which created against any asset like Reserve for Bad debts - {against debtors} or Investment Fluctuation Res -
{against Investment} will be transferred to realisation account because debtors and investments are also being transferred )

Step 3: Now the assets will either be sold for cash or they can be taken over by partner

Bank A/c DR (sale price)

To realisationa/c
(being assets sold for cash )

Partner's Cap A/c Dr

To realisation A/c
(being assets taken over)

Step 4: Now the liabilties will either be paid for cash or they can be undertaken by partner
(note we have to pay all liabilities even no info is given in question)

Realisationa/c
To Bank A/c
(being liabilty paid)

Realisationa/c
ToPartner's Cap A/c
(being liabilty undertaken)

Step 5: Expenses on Realisation We have to understand all the following cases

Case 1) When realization Exp is to be borne by Firm and it is paid also by firm

Realisation A/c Dr XX
To Bank A/c XX

Case 2) when relization expense is to be borne by firm but it is paid by partner

Realisation A/c Dr XX
To partner's cap XX

Case 3) It was agreed that Mr A will charge Rs 10000 for realisation and he will bear all realisation Exp.
actual realisation expenses was Rs 7000

Realisation A/c Dr 10000

To partner's cap 10000

(No entry is required to be passed for Rs 7000)

Case 4) It was agreed that Mr A will charge Rs 10000 for realisation and he will bear all realisation Exp.
actual realisation expenses was Rs 7000 and it was paid by firm

Realisation A/c Dr 10000

To partner's cap 10000 Realisation A/c Dr 10000
To partner's cap 3000
Partner Cap A/c Dr 7000 To Cash A/c 7000
To Cash A/c 7000
STEP 5: After all the above steps we will balance Realisation Account the balancing figure will be Realisation Profit / Loss
It will be distributed to partners in PSR

Important Points :
i) No entry if asset is taken over by any creditor/ liabililty

Creditor Dr (Realisation)
To Car (Realisation)

ii) Unrecorded Assets and liability can be sold / paid in same manner as stated in step 3 and step4
(however these will not be transferred to Realsiation a/c as per Step 1 & step2)

In FULL Question we have to prepare Following Ledgers :

i) Realisation A/c
ii) Partner's Cap A/c
iii) Partner's Loan A/c
iv) Cash A/c (to be matched)
REALISATION A/c (FORMAT)
Particular Amt Dr Particular Amt Cr
To Various Assets ' (name) step 1 By Various Liabilities (name) step 2

To Bank (Liability Paid) step 4 By Bank(Asset Sold) step3

To Partners Cap (Liab undertaken) By Partner's Cap (asset taken over)

To Bank / Partner's Cap [Exp] step 5

To Profit on realisation Bal Fig

A
B

PARTNER's CAPITAL A/c

Particular A B Particular A B
To P&L Loss By Balance B/d
To Realisation (Asset Taken over) By P&L / Gen Res/ WCR (idle)
By Relaisation (Liabilty undertaken)
TO BANK (BAL FIG) ???? ???? By Realisation (exp )
By Realisation (Profit)

PARTNER's LOAN A/c

Particular AMT Particular AMT
By Bal B/d xxxx
TO BANK (BAL FIG) ????

In any short amt is paid or extra is paid the balancing fig if any will be transferred to Realisation a/c
 CASH / BANK A/c
Particular AMT Particular AMT
To Balance b/d op By Real (Liab Paid)
To Real (asset sold) By Real (Exp Paid)
By Partner's Loan (paid)
By Partner's Cap (Paid)]

MATCH MATCH