What Is Dissolution of Partnership Firm Class 12 TS Grewal Explained

Definition and Meaning of Dissolution of Partnership Firm

Dissolution of a partnership firm means the process of ending the business relationship between partners and closing the firm's operations. According to TS Grewal and NCERT, it involves settling all accounts, paying off liabilities, and distributing remaining assets among partners.

Key points:

• It can be complete (firm closes entirely) or partial (one or more partners leave).
• Dissolution legally ends the partnership agreement.
• It is different from retirement or death of a partner, which may not end the firm.

This topic is essential for Class 12 Accountancy students to understand how firms wind up business and how accounts are prepared during dissolution.

Types of Dissolution of Partnership Firm

Dissolution of partnership firms can be classified into two main types:

1. Dissolution of Partnership (Partial Dissolution)

• Occurs when one or more partners leave, but the firm continues.
• Remaining partners continue the business.

2. Dissolution of Firm (Complete Dissolution)

• The entire business is closed.
• All assets are sold, liabilities paid, and profits or losses shared.

Other Causes of Dissolution

• Mutual agreement among partners
• Expiry of partnership term
• Insolvency of a partner or firm
• Court order
• Death or insanity of a partner

Understanding these types helps Class 12 students identify how partnership firms may end partially or fully.

Accounting Treatment During Dissolution of Partnership Firm

Accounting for dissolution involves several steps to close the firm's books:

• Realisation of Assets: Selling all assets except cash to convert into cash.
• Payment of Liabilities: Settling all outstanding debts and obligations.
• Settlement of Partners’ Capital Accounts: Distributing remaining cash among partners based on their capital and profit-sharing ratio.

Key Journal Entries

• To transfer assets to Realisation Account:

`` Realisation A/c Dr. To Asset A/c ``

• To transfer liabilities to Realisation Account:

`` Liability A/c Dr. To Realisation A/c ``

• To record cash received on asset sale:

`` Cash/Bank A/c Dr. To Realisation A/c ``

• To pay off liabilities:

`` Realisation A/c Dr. To Cash/Bank A/c ``

• To distribute profit or loss on realisation:

`` Realisation A/c Dr./Cr. To Partners’ Capital A/cs ``

This process is crucial for Class 12 students to practice for their NCERT Accountancy exams.

Role of Goodwill in Dissolution of Partnership Firm

Goodwill represents the firm's reputation and earning capacity. During dissolution, goodwill is treated carefully:

• If goodwill is already recorded, it is transferred to partners’ capital accounts.
• If goodwill is not recorded, it may be brought in or written off depending on the dissolution agreement.

Treatment Examples:

• Writing off goodwill:

`` Partners’ Capital A/c Dr. To Goodwill A/c ``

• Bringing in goodwill amount:

`` Partner bringing goodwill Dr. To Goodwill A/c ``

Goodwill adjustments affect the final cash distribution and partner balances, making it an important topic for Class 12 students to master.

Difference Between Dissolution of Partnership and Dissolution of Firm

Understanding the difference helps clarify concepts:

This comparison is often asked in Class 12 exams and helps students avoid confusion.

Worked Example: Calculating Cash to be Paid on Dissolution

Consider a partnership firm with the following details:

• Assets (other than cash): ₹2,00,000
• Liabilities: ₹50,000
• Partners’ capitals: A ₹1,00,000, B ₹50,000
• Assets sold for ₹1,80,000
• Liabilities paid in full

Steps:

1. Realisation of assets:

• Assets sold for ₹1,80,000 (less than book value ₹2,00,000)

2. Pay liabilities ₹50,000 3. Calculate cash available:

• Cash from assets: ₹1,80,000
• Less liabilities paid: ₹50,000
• Cash left: ₹1,30,000

4. Distribute cash among partners based on capitals:

• Total capitals = ₹1,50,000
• A’s share = (₹1,00,000/₹1,50,000) × ₹1,30,000 = ₹86,667
• B’s share = (₹50,000/₹1,50,000) × ₹1,30,000 = ₹43,333

This example demonstrates practical application of dissolution accounting for Class 12 students.