Dissolution of partnership means the relationship between the partners will change and

the remaining partners may continue its business under the same firm’s name with a
new agreement. Thus, admission, retirement and death of a partner are considered as
dissolution of partnership.
Distinguish between Dissolution of Partnership and Dissolution of Firm.

Basis Dissolution of Partnership Dissolution of Partnership Firm

(i) Economic relation It means a change in the It means economic relationship

economic relation between the among partners comes to an end.
partners.

(ii) Settlement of Assets and liabilities are revalued Assets are realised and liabilities
assets and liabilities and new balance sheet is drawn are paid off after the accounts are
after settlement of account. finally settled.

(iii) Closure of books It does not require closure of All books of accounts are closed
books because the business of as the business is closed down.
firm is continued.

(iv) Court intervention Court doesnot intervene because A firm can be dissolved by court
partnership is dissolved by natural order.
agreement.

Difference between reconstitution of firm and dissolution of a firm.

Reconstitution of partnership means to change the existing agreement between the partners,
whereas dissolution of firm means the dissolution of partnership between all the partners of
the firm
MODES OF DISSOLUTION OF A FIRM
The modes by which a firm may be dissolved are:
1. By Mutual Agreement: A firm may be dissolved when all the partners agree for
its dissolution. A partnership firm is set up by an agreement, similarly, it can be
dissolved by an agreement.
2. Compulsory Dissolution: A firm may be compulsorily dissolved:
(a) when all the partners or all the partners except one become insolvent.
(b) when business of the firm becomes unlawful.
3. By Notice: In case Partnership is at Will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the firm.
[Section 43]
4. On Happening of an Event: A firm may be dissolved in any of the following
events, if the Partnership Deed so provides:
(a) on expiry of the term for which the firm was constituted.
(b) on completion of the venture.
(c) on death of a partner.
(d) on adjudication of a partner as insolvent.
5. Dissolution by Court (sec 44) Court may pass order for the dissolution of the
firm when:
(a) a partner becomes a person of unsound mind;
(b) a partner becomes permanently incapable of performing his duties as a partner;
(c) a partner is found guilty of misconduct, which is likely to adversely affect the
business of the firm;
(d) partnership agreement is breached persistently by a partner or partners;
(e) court finds dissolution of the firm justified;
(f) When the business of the firm cannot be carried on except at a loss.
Settlement of Accounts on Dissolution
Sections 48 of the partnership act specify the mode of settlement of accounts on the
dissolution of a partnership firm. It is as follows :
(1) First of all, the amount of loss, including the deficiency of Capital shall be paid out of
profits, next out of Capital, and lastly, if necessary, will be realised from the partners in their
profit sharing ratio.
(2) Amount realised from the sale of the assets of the firm (including any sum
contributed by the partners), shall be applied in the following manner and order :
(I) First of all, outside debts of the firm will be paid.
(II) Out of the remaining amount, the loans advanced by partners will be paid off.
(III) Thereafter the balance of partners Capital Accounts will be returned.
(IV) If some amount remains, it will be divided among the partners in their profit sharing ratio.

Difference between Firm’s Debts and Private Debts

Basis Firm's Debts Private Debts

Firm's debt means the debt Private debt means debt owed
1. Meaning owed by the firm to outsiders. by a partner in his personal
capacity to any other person.

All the partners are liable Concerned partner is liable

2. Liability jointly and severally for firm's personally for his private debts.
debts.

Firm's property is applied first Share of the concerned partner

3. Application of for settling firm's debts. in excess of firm's property over
Firm's Property firm's debts can be applied for
private debts.

Excess of partner's private Private property is applied first

4. Application of
property over his private debts for private debts then towards
Private Property
can be applied for firm's debts. firm's liability.

1. What is meant by ‘Realisation Account’?

Ans. Realisation Account is a nominal account opened in the event of dissolution of a firm.
The purpose of this account is to find out profit or loss on realisation of assets and payment
of liabilities.
2. In case of dissolution of a firm which liabilities are to be paid at first?
Ans. Firm’s debts to the third parties are to be paid first at the time of dissolution.
3.In case of dissolution of a firm, which item on the liabilities side are to be paid last?
Ans.Final payments of the partners on their capital accounts are to be paid last at the time of
dissolution.
4. State the liabilities of partners in case of dissolution of a firm.
Ans. The private property of the partners can be used for paying business debts.
5. Name the assets that is not transferred to the debit side of Realisation Account, but
brings certain amount of cash against its disposal at the time of dissolution of the
firm.
Ans. Unrecorded Assets
6. List any two modes of dissolution of a partnership firm.
7.A and B are partners in a firm sharing profits in the ratio of 3:2. Mrs A has given a
loan of Rs. 20,000 to the firm and the firm has also taken a loan of Rs. 10,000 from
B. The firm is dissolved and its assets were realised for Rs. 25,000. State the
order of payment of Mrs A’s Loan and B’s Loan with reason, if there were no other
creditors of the firm.
Ans. According to Section 48 of Indian Partnership Act 1932, Mrs A’s Loan of Rs. 20,000,
being third party debt, will be paid before payment of B’s Loan. B will be paid upto the
available cash, i.e., Rs. 5,000.
8. State any four situations in which the court may order to dissolve a partnership
firm. Ans. The Court may order to dissolve a firm under the following situations:
(a) When a partner become of unsound mind.
(b) When a partner is found guilty of misconduct in carrying out the business.
(c) When a partner becomes permanently incapable of performing his duty.
(d) Any other time when court find it is justified to dissolve the firm.
9. On dissolution, how will you deal with partner’s loan if it appears on the
(a) assets side of the Balance Sheet
(b) liabilities side of the Balance Sheet
(a)

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Partner’s Capital A/c Dr.

To Partner’s Loan A/c

(b)

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)

 Partner’s Loan A/c Dr.
To Cash/Bank A/c

10. The Balance Sheet of a firm under dissolution shows Debtors at Rs. 60,000 and
provision for bad debts at Rs. 2,500. If Debtors of Rs. 10,000 proved bad and remaining
realised 90% of its value, the amount to be credited to Realisation will be:
(a) Rs. 54,000 (b) Rs. 42,750 (c) Rs. 48,000 (d) Rs. 45,000

11. On dissolution of partnership firm of A and B, A’s loan of Rs. 10,000 and Mrs. B’s loan of
Rs. 25,000 appear on liabilities side of balance sheet. Payment will be made first to:
(a) Mrs. B’s Loan
(b) A’s Loan
(c) Both of them in ratio of amount of Loan
(d) Both of them in profit sharing ratio of A and B

12. On dissolution of a firm, its Balance Sheet revealed total creditors Rs.50,000; Total
Capital Rs.48,000; Cash Balance Rs.3,000. Its assets were realised at 12% less. What will
be loss on realisation?
13. On the basis of following data, how much final payment to a partner on firm’s dissolution
will be made?
Debit balance of Capital Account Rs. 14,000; Share of his profit on realisation
Rs.43,000; Firm’s asset taken over by him for Rs.17,000.
14. If total assets are Rs.2,00,000; total liabilities are Rs.40,000; amount realised on sale of
assets is Rs. 1,75,000 and realisation expenses are Rs.3,000, what will be the profit or loss
on realisation?
15. In the Balance Sheet Total Debtors appear at Rs.50,000 and Provision for Doubtful
Debts appear at Rs. 1,500. How much amount will be realised from Debtors, if bad
debts amount to Rs. 10,000 and remaining debtors are realised at a discount of 5%
16. There was a contingent liability for B/R received from Ashok for Rs.20,000 and
discounted with the bank. Ashok became insolvent and 75 paise in a rupee were
received from his estate. How much amount will be debited/credited to Realisation
Account?
17. How much amount will be paid to Creditors for Rs.25,000 if Rs.5,000 of the creditors are
not to be paid and the remaining creditors agreed to accept 5% less amount?
18. On dissolution of a firm, its Balance Sheet revealed capital Rs.5,00,000; General
Reserve Rs.2,00,000, Creditors Rs. 1,00,000 and cash balance Rs.20,000. Assets
were realised at 60%. What will be loss on realisation?
19. Fixed Assets appear in the Balance Sheet of a firm at Rs.52,000. They realised at a loss
of 4% on net collection. State the amount collected from such assets.
 10.45,000 11. B’s loan 12. 11,400 13. 12,000 14. Loss 28,000
15.38,000 16. Dr.20,000 cr 15,000 17. 19,000 18. 3,12,000
19 50,000

20. The Balance Sheet of a firm under dissolution shows Debtors at Rs. 60,000 and
provision for bad debts at Rs. 2,500. If Debtors of Rs. 10,000 proved bad and remaining
realised 90% of its value, the amount to be credited to Realisation will be:
(a) Rs. 54,000 (b) Rs. 42,750 (c) Rs. 48,000 (d) Rs. 45,000
21. On dissolution of a firm, partners’ capital account balance was Rs. 63,000; creditors
account balance was Rs. 12,000 and profit and loss account debit balance was Rs.
6,000. Profit on realisation of assets was Rs. 7,800. Total amount realises from assets
was :
(a) Rs. 81,000 (b) Rs. 76,800 (c) Rs. 70,800 (d) None of these

22. In which condition, a partnership firm is deemed to be dissolved?

(a) On a partner’s admission (b) On retirement of a partner
(c) On expiry of the period of partnership (d) On loss in partnership
23. At the time of dissolution of a firm, Loans given by partners to the firm is paid out of the
amount realised on sale of assets:
(n) After making the payment of loans given by third party
(b) After making the payment of balance of Capital Account of partners
(c) After making the payment of above (a) and (b)
(d) Before the payment of loans given by third party
24. In the event of dissolution of a partnership firm, the provision for doubtful debts is
transferred to________.
25. Partnership can be brought to an end by giving notice in case:
(a) Partnership is for a fixed period
(b) Partnership is not for a fixed period
(c) Partnership at will
(d) The purpose for which it was established has come to an end

20.D 21.B 22. C 23.A 24. Realisation 25. C

222gh
2
 JJJournal Entries
Question 1 Manoj and Nand were partners sharing profits in the ratio of 3 : 2. Pass journal
entries under following situations at the time of dissolution of firm :
(i) Workmen Compensation Reserve stood at Rs. 1,00,000 and there was no liability
towards Workmen Compensation.
(ii) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it
was acertained at Rs.75,000.
(iii) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it
was ascertained at Rs. 1,20,000.
(iv) Workmen Compensation Reserve stood at Rs. 1,00,000 and liability in respect of it
was ascertained at Rs. 1,00,000.
(v) General reserve appearing in the balance sheet was rs 20,000
(vi) Profit and loss Account balance of rs 50,000 appeared on the asset side of the
balance sheet.(Dr.Balance)
(vii)Profit and loss Account cr balance appeared in the books -60,000

Question 2
(1) Sale of Assets—Rs. 50,000.
(2) Payment of Liabilities—Rs. 10,000.
(3) Bank Loan Rs. 12,000 was paid.
(4) Bank overdraft Rs. 14,000 was paid.
(5) Stock worth Rs. 16,000 was taken over by partner Q.
(6) Partner P paid a creditor Rs. 4,000.
(7) Stock worth Rs. 16,000 was taken over by partner Q for cash
(8) An asset not appearing in the books of accounts realised Rs. 1,200.
(9) Goodwill realized for 13,000.
(10) Ashish, an old customer whose account for Rs. 1,000 was written off as bad
in the previous year, paid 60%, of the amount.
(11) There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of
Rs. 2,000 which had beenwritten-off completely from the books. These shares
are valued @ Rs. 6 each and divided among the partners in their profit-sharing
ratio.
(12) ‘Z’ one of the partners was to bear all the realisation expenses for which he was
given a commission of 2% of net cash realised from dissolution. Cash realised from
assets was Rs.25,000 and cash paid for liabilities amounted to Rs.5,000.
(13) There were total debtors of Rs.76,000. A provision of bad and doubtful debts also
stood in the books at Rs.6,000. Rs. 12,000 debtors proved bad and rest paid the
amount due.
(14) A contingent liability (not provided for) of Rs.4,000 was also discharged.
(15) An unrecorded asset of Rs. 35,000 was given to an unrecorded creditor of Rs.50,000
in settlement of his claim of Rs.30,000 and the balance was paid to him in cash.
(16) P’s loan was appearing on the liabilities side of the Balance Sheet at Rs.50,000. He
accepted an unrecorded asset of Rs.40,000 at Rs.35,000 and the balance was paid to
him in Cash.
(17) There was a bill for Rs. 1,200 under discount. The bill was received from Soham who
proved insolvent and a first and final dividend of 25% was received from his estate.
(18) Angad was paid only Rs. 5,000 (in full settlement) for his loan to the firm which
amounted to Rs. 5,500.
DR Angad’s loan 5500 Cr cash 5000 realisation 500
(19) Harsh's loan of Rs. 6,000 was discharged at Rs. 6,200.
(20) Geeta, a partner was appointed to look after the dissolution work, for which she was
allowed a remuneration of Rs. 10,000. Geeta agreed to bear the dissolution expenses.
Actual dissolution expenses Rs. 9,500 were paid by Geeta.
Dr. Realisation A/c Rs. 10,000, Cr. geeta’s Capital A/c Rs. 10,000.
(21) Janki, a partner, agreed to look after the dissolution work for a commission of Rs.
5,000. Janki agreed to bear the dissolution expenses. Actual dissolution expenses Rs.
5,500 were paid by Mohan, another partner, on behalf of Janki.
(a)Dr. Realisation A/c Rs. 5,000; Cr. Janki’s Capital A/c Rs. 5,000.
(b) Dr. Janki’s Capital A/c Rs. 5,500; Cr. Mohan’s Capital A/c Rs. 5,500.
(22) A partner, Kavita, agreed to look after the dissolution process for a commission of Rs.
9,000. She also agreed to bear the dissolution expenses, Kavita took over furniture of Rs.
9,000 for her commission. Furniture had already been transferred to Realisation Account.
a) Dr. Realisation A/c Rs. 9,000; Cr. Kavita’s Capital A/c Rs. 9,000.
(b) Dr. Kavita’s Capital A/c Rs. 9,000; Cr. Realisation A/c Rs. 9,000. Or no
(22) A debtor, Ravinder, for Rs. 19,000 agreed to pay the dissolution expenses which
were Rs. 18,000 in full settlement of his debt.
No entry
Ans1 (i) Dr. Workmen Compensation Reserve and Cr. Partner’s Capital A/cs in 3:2.
(ii) Dr. Workmen Compensation Reserve and Cr. Realisation A/c by Rs.75,000 and
Partner’s Capital A/cs by Rs.25,000.
(iii) Dr. Workmen Compensation Reserve and Cr. Realisation A/c by Rs. 1,00,000.
(iv) Same as Case (iii)
(v)General reserve dr
To partners capita in PSR
(vi) Partner capital dr
To profit and loss a/c
(vii) Profit and loss dr
To partners capita in PSR

Ans 2
Ans .3 (a) (b) & (c): Debit Realisation A/c and Credit Bank A/c.
(d) Debit Rajat’s Capital A/c and Credit Realisation A/c.
(e) Debit Realisation A/c by Rs. 1,000; Credit Bank A/c by Rs.800 and Aman’s
Capital A/c by Rs.200.
(f) Debit Aman’s Capital A/c by Rs.36,000 and Rajat’s Capital A/c by Rs.18,000;
Credit Realisation A/c by Rs.54,000.]

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Question 3 Give the necessary journal entries for the following transactions on dissolution of
the firm of Aman and Rajat on 31 st March, 2016, after the transfer of various assets (other
than cash) and the third party liabilities to Realisation Account. They shared profits and
losses in the ratio of 2 : 1.
(A) There was a bill of exchange of Rs. 10,000 under discount. The bill was received
from Derek who became insolvent.
(b) Bills Payable of Rs.30,000 falling due on 30th April, 2016 was discharged at
Rs.29,550. ' "
(c) Creditors of Rs.30,000 took over stock of Rs. 10,000 at 10% discount and the
balance was paid to them in cash,
(d) There was an old typewriter which had been written off completely. It was estimated
to realize Rs.600. It was taken away by Rajat at 25% less than the estimated price.
(e) Aman agreed to take over the responsibility of completing dissolution at an agreed
 remuneration of Rs. 1,000 and to bear all realization expenses. Actual realisation
expenses Rs.800 were paid by the firm.
(f) Loss on realization was Rs.54,000.jjjhjh

Ans .3 (a) (b) & (c): Debit Realisation A/c and Credit Bank A/c.
(d) Debit Rajat’s Capital A/c and Credit Realisation A/c.
(e) Debit Realisation A/c by Rs. 1,000; Credit Bank A/c by Rs.800 and Aman’s
Capital A/c by Rs.200.
(f) Debit Aman’s Capital A/c by Rs.36,000 and Rajat’s Capital A/c by Rs.18,000;
Credit Realisation A/c by Rs.54,000.]