Dissolution of Partnership: Termination of partnership agreement (due to admission, retirement, death, change in ratio). Business continues; only revaluation A/c prepared; no court intervention.
Dissolution of Firm: Complete winding up of business. Firm ceases to exist; assets sold, liabilities paid; Realisation A/c prepared; court may intervene.
MODES OF DISSOLUTION OF FIRM (5 TYPES)
1. By agreement: Partners voluntarily agree to dissolve.
2. Compulsory dissolution: On insolvency of partner or business becoming illegal.
3. By notice: In partnership at will, any partner may dissolve by serving notice.
4. On happening of contingencies: As per deed – expiry of term, death, completion of work, insolvency.
5. By court: On suit by partner – grounds: insanity, permanent incapacity, misconduct, breach, transfer of interest, business at loss, just and equitable.
SETTLEMENT OF ACCOUNTS – SECTION 48
Treatment of Losses (order):
- First out of profits.
- Next out of partners' capital.
- Lastly, if necessary, by partners individually in profit-sharing ratio.
- Payment of firm's debts to third parties.
- Payment to partners for advances (loans) proportionately.
- Payment to partners for capital proportionately.
- Residue (if any) divided among partners in profit-sharing ratio.
FIRM'S DEBTS vs PRIVATE DEBTS – SECTION 49
Firm's property: Applied first for firm's debts. Surplus (if any) used for partner's private debts.
Partner's private property: Applied first for partner's private debts. Surplus used for firm's debts.
REALISATION ACCOUNT – ACCOUNTING PROCEDURE
Meaning: Nominal account prepared to close all assets & liabilities and find profit/loss on realisation.
Key Journal Entries:
- Transfer of assets (except cash/bank): Realisation A/c Dr.; To Sundry Assets A/c.
- Transfer of external liabilities: Sundry Liabilities A/c Dr.; To Realisation A/c.
- Sale of assets (cash): Bank A/c Dr.; To Realisation A/c.
- Asset taken over by partner: Partner's Capital A/c Dr.; To Realisation A/c.
- Payment of liabilities: Realisation A/c Dr.; To Bank A/c.
- Liability taken over by partner: Realisation A/c Dr.; To Partner's Capital A/c.
- Realisation expenses paid by firm: Realisation A/c Dr.; To Bank A/c.
- Expenses paid by partner on behalf of firm: Realisation A/c Dr.; To Partner's Capital A/c.
- Profit on realisation: Realisation A/c Dr.; To Partners' Capital A/cs (in PSR).
- Loss on realisation: Partners' Capital A/cs Dr.; To Realisation A/c.
Unrecorded liability paid: Realisation A/c Dr.; To Bank A/c.
DIFFERENCE: REALISATION A/c vs REVALUATION A/c
| Realisation A/c | Revaluation A/c |
|---|---|
| Prepared at dissolution of firm. | Prepared at admission/retirement/death. |
| To find profit/loss on realisation of assets & settlement of liabilities. | To find profit/loss on revaluation of assets & liabilities. |
| All assets & liabilities transferred at book value. | Only changes in value recorded. |
| Realisation expenses recorded. | No expenses recorded. |
| Closes the books of the firm. | Books continue; new balance sheet prepared. |
TREATMENT OF GOODWILL, RESERVES & ACCUMULATED LOSSES
Goodwill: Transferred to Realisation A/c at book value. If realised or taken over, recorded accordingly.
Reserves & Credit balance of P&L: Transferred to Partners' Capital A/cs in profit-sharing ratio.
Accumulated losses (P&L Dr.): Written off against Partners' Capital A/cs in profit-sharing ratio.
IMPORTANT EXAM QUESTIONS
1. Give any four situations that lead to dissolution of partnership but not dissolution of firm (2 marks).
2. State any four grounds on which court may order dissolution of a firm (3 marks – 2024 Say).
3. Fill in the blanks: Losses on dissolution are paid first out of _______, next out of _______, and lastly by _______ (2 marks – 2024 Mar).
4. Pass journal entries for dissolution transactions (4 marks – 2025 Mar).
5. Distinguish between Realisation Account and Revaluation Account.
6. Explain the order of payment of assets under Section 48.
7. Distinguish between firm's debts and private debts under Section 49.