Partnership Dissolution

By: Marichu S. Fornolles, CPA, MBA

• A partnership is fiduciary in character. It is based on trust and confidence. Thus,
the partners has the right who they want to associate and disassociate with.
What is dissolution?
• It is defined as the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business. (Article 1825 of the
New Civil Code)
Is Dissolution the same with Liquidation?
No.
Dissolution Liquidation
• Is a change of relationship • Termination of the business
between partners and normally activities carried on by the
followed by a formation of new partnership. It is the winding up
partnership or liquidation of the of affairs preparatory to going
partnership out of business.
 • Admission of a new partner

Causes of • Withdrawal or retirement of a partner

• Death, incapacity or bankruptcy of a
Dissolution partner
• Incorporation of a partnership
Admission of a New
Partner
• Should be done with the consent of ALL partners
(fiduciary in character)
• The old partnership is dissolved and a new partnership
is formed.
 Investment of assets
in the partnership by
Two ways by the new partners.

which
admission of
a new partner
may occur Purchase of interest
from one or more of
the existing partners.
 • Does not really affect the total assets

Admission by and liability of the partnership

• It is a personal transaction of partners
purchase of • Debit capital account of the old partner
and credit the capital account of the
interest new partner.
• No gain or loss.
 • A new partner may be admitted in the partnership by
Admission by investing cash or other assets IN the PARTNERSHIP.
investment • Total assets and total capital increases.
 • Before there were two methods, the
Goodwill method and the Bonus
Method used method.
• However, Goodwill method was
for Admission abandoned and so, all admission by
investment uses Bonus Method
by Investment • Because this method is used, the total
contributed capital will always equal to
the total agreed capital.
 • If the Investment made by the New Partner is >
Bonus to New the Capital Credit to the New Partner = Bonus
to the Old Partners. They will share such bonus
Partner vs. in accordance with their P/L ratio.

Bonus to old • If the Investment made by the New Partner is <

the Capital Credit to the New Partner = Bonus
Partners to the New Partner. They will share such loss in
accordance with their P/L ratio.
Withdrawal or Retirement
of a Partner
Accounting for the interest of the withdrawal
partner may be carried out in any of the ff ways:
1. By selling his interest to one or more of the remaining partners
2. By selling his interest to an outsider
3. By selling his interest to the partnership

Note: The books should be updated before withdrawal.

By selling his interest to one or more of the remaining
partners
• Accounting is the same with Admission of a Partner by purchase of interest
• It is a personal transaction
• Gain or loss is for the benefit or expense of the Partner
By selling his • This should be done with consent of all partners
interest to an • Same accounting with admission of partner by
purchase of interest.
outsider
Sale of Interest to the Partnership
• Accounting is the exact reverse of Admission by investment.
• In this manner, the total assets and total capital of the partnership decreases.
• If the assets paid to the withdrawing partner > than his capital credit = bonus to
the withdrawing partner
• If the assets paid to the withdrawing partners < than his capital credit, bonus to
the remaining partners
Death of a Partner
 • The old partnership is dissolved.
Death of a • The remaining partners may continue or
Partner liquidate the partnership.
• Accounting is similar to withdrawal of a partner.
Incorporation of a
Partnership
Steps in Incorporation
1. Update the balances of the accounts to its current fair market value.
2. Provide the closing entries of the Partnership
3. Prepare the entries to record the creation of the New Corporation.
-END-