Dissolution of Partnership Firm: Complete Guide for Class 12 Accountancy

Understanding Dissolution of Partnership Firm

Dissolution of a partnership firm refers to the complete closure of the business, where all assets are sold, liabilities are paid off, and the firm ceases to exist. This is different from the dissolution of partnership, which only ends the relationship between partners but the firm may continue.

Key points:

• The firm’s business operations stop permanently.
• Assets are converted into cash to pay off liabilities.
• Remaining cash is distributed among partners according to their capital balances.

This topic is an important part of the Class 12 NCERT Accountancy syllabus and helps students understand the accounting procedures for winding up a firm.

Journal Entries During Dissolution of Partnership Firm

Journal entries are crucial for recording all transactions during dissolution. The main entries include:

1. Transfer of Assets to Realisation Account

• Debit Realisation Account
• Credit respective asset accounts (except cash/bank)

2. Transfer of Liabilities to Realisation Account

• Debit liability accounts
• Credit Realisation Account

3. Recording Sale of Assets

• Debit Cash/Bank Account
• Credit Realisation Account

4. Payment of Liabilities and Realisation Expenses

• Debit Realisation Account
• Credit Cash/Bank or Partners’ Capital Account if expenses are borne by partners

5. Transfer of Profit or Loss on Realisation

• Debit or Credit Realisation Account
• Credit or Debit Partners’ Capital Accounts in profit-sharing ratio

6. Settlement of Partners’ Capital Accounts

• Debit Partners’ Capital Accounts
• Credit Cash/Bank Account

Worked Example:

If stock worth ₹7,500, debtors ₹21,500, and fixed assets ₹36,500 are transferred to Realisation Account, the entry is:

`` Realisation A/c Dr. 65,500 To Stock A/c 7,500 To Sundry Debtors A/c 21,500 To Fixed Assets A/c 36,500 ``

This systematic recording helps in transparent settlement of accounts.

Order of Settlement on Dissolution

The settlement of accounts during dissolution follows a specific order to ensure all dues are cleared properly:

1. Payment of Firm’s External Liabilities: All debts owed to outsiders must be paid first.

2. Payment of Partner’s Loans: Any loans given by partners to the firm are repaid next.

3. Payment of Partner’s Capital: The remaining cash is used to repay partners’ capital balances.

4. Distribution of Remaining Cash or Assets: Any surplus is distributed among partners in their profit-sharing ratio.

This order protects the interests of creditors and ensures fair treatment of partners.

Accounting Treatment of Unrecorded Assets and Liabilities

Sometimes, unrecorded assets or liabilities appear during dissolution. These must be accounted for properly:

• Unrecorded Assets:
• Record at estimated realizable value in Realisation Account.
• Debit Realisation Account and credit the asset account.

• Unrecorded Liabilities:
• Record at estimated amount payable in Realisation Account.
• Debit liability account and credit Realisation Account.

Example:

If an unrecorded asset valued at ₹5,000 is found, the entry is:

`` Realisation A/c Dr. 5,000 To Unrecorded Asset Account 5,000 ``

This ensures all assets and liabilities are included in the final settlement.

Treatment of Partner’s Loan on Dissolution

Partner’s loan can appear either as an asset or liability on the balance sheet, and its treatment differs accordingly:

• Loan on Asset Side:
• Means firm has given loan to partner.
• On dissolution, recover this loan from the partner.
• Entry:

`` Partner’s Capital A/c Dr. To Realisation A/c ``

• Loan on Liability Side:
• Means partner has given loan to firm.
• On dissolution, repay the loan to the partner.
• Entry:

`` Realisation A/c Dr. To Partner’s Loan A/c ``

This distinction is vital for correct accounting and fair settlement.

Difference Between Dissolution of Partnership and Dissolution of Partnership Firm

Understanding the difference is important for Class 12 students:

This comparison clarifies the scope and impact of each type of dissolution.