Chapter 5 Dissolution of Partnership Firm Solutions
Question - 1 : - State the difference between dissolution of partnership and dissolution of partnership firm.
Answer - 1 : -
| Basis of Comparison | Dissolution of Partnership | Dissolution of Partnership firm |
| Meaning | It refers to the stage where a partner/partners discontinue their relationship with the firm. | It refers to the situation that all the relation between a firm and its partners cease to exit |
| Discontinuation | Business continues as usual | Discontinuation of business due to dissolving of firm |
| Accounts | Revaluation account is created | Realization account is created |
| Liabilities and assets | Revaluation is done | Sold off to pay for the liabilities |
| Economic Relationship | Continues | It comes to an end |
| Nature | Such type of event is voluntary in nature | It can be sometimes compulsory and sometimes voluntary |
| Effect | Firm is not dissolved | Both firm and partnership are dissolved |
Question - 2 : - State the accounting treatment for:
i. Unrecorded assets
ii. Unrecorded liabilities
Answer - 2 : -
(i) For Unrecorded Assets
An unrecorded asset is such an asset whose value is written off from books of accounts, but it is in usable form. It is shown as:
1. If sold by cash
Cash A/c Dr.
To Realisation A/c
(Unrecorded asset sold off for cash)
2. If taken over by any partner
Partner’s Capital A/c Dr.
To Realisation A/c
(Partner takes over unrecorded asset)
ii) For unrecorded liabilities
Liabilities that are not recorded in books of firm are called unrecorded liabilities. It can be shown in records as
1. When unrecorded liability is paid off
Realisation A/c Dr.
To Cash A/c
(Paid in cash the price of unrecorded liability)
2. When undertaken by a partner
Realisation A/c Dr.
To Partner’s Capital A/c
(Liability that is unrecorded is taken over by partner)
Question - 3 : - On dissolution, how 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
Answer - 3 : -
(a) When a partner’s loan is on the asset side of balance sheet, it means that partner has borrowed some amount from business and needs to pay back the same. In this instance, the loan amount gets transferred to the partners’ capital account. It is shown as:
Partner’s Capital A/c Dr.
To Partner’s Loan A/c
(Loan account of partner transferred to partner capital account)
(b) When a partner’s loan appears on liabilities side of balance sheet, it means that partner has provided loan to the business and the business has to pay back the amount which it has got from the partner. The loan is paid in cash after full filling payment of all external liabilities.
Partner’s Loan A/c Dr.
To Cash/Bank A/c
(Loan taken from partner paid in cash)
Question - 4 : - Distinguish between firm’s debts and partner’s private debts.
Answer - 4 : -
| Basis of Comparison | Firm’s Debts | Partner’s Private Debts |
| Meaning | Debts that are owed by a firm to the outsiders | Debts that are owed by a partner to any other person outside the firm. |
| Liability | Liability of firm’s debt lies with all the partners jointly as well as individually. | The liability of repaying debt rest only with the partner who has taken the debt. |
| Debt Settlement by private assets | Whenever debts of firm exceeds the assets of firm, the partner’s private assets may be utilized in order to pay firms debt, only on the condition that the partner’s asset is more than his debts | The debts that are private will be settled by private assets of the partner. If any surplus happens it will be used in paying for firms debts |
| Debt settlement by firm’s assets | Debts of firms’ are settles using assets’ of firm. If any asset remains after clearing the debt, it gets distributed between the partners. | Partner can utilize their share of surplus assets obtained after clearing all debts from firm for personal use. |
Question - 5 : - State the order of settlement of accounts on dissolution.
Answer - 5 : -
Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.
1. Amount which is received on sale of assets should be used in this sequence:
i. Paying off all external expenses and liabilities
ii. Loans and advances that are owed to partners should be cleared.
Iii.Capitals of all the partners must be paid off.
Any amount that still remains after paying off all these items must be distributed among partners of the dissolute firm in their original profit sharing ratio.
2. In case of loss and capital deficiency, the following must be paid in this order:
i. Adjust loss and capital deficiency against profits of firm
ii. Adjust against the total capital of the firm
iii. If any loss or deficiencies is present after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.
Question - 6 : - On what account realisation account differs from revaluation account.
Answer - 6 : -
| Basis of Comparison | Realisation Account | Revaluation Account |
| Meaning | It is an account that is prepared to determine the net profit or loss on sale of assets and discharging of liabilities of the firm | It is an account that is prepared to determine variation in value of liabilities and assets of a firm. |
| Comprises of | All Liabilities and assets | Only those liabilities and assets that are revaluated |
| Time of preparation | During dissolution of firm | During firm restructuring |
| Frequency of Preparation | One time, when firm is dissolved. | As and when a new partner is introduced or an existing partner leaves the firm |
| Effect | All accounts related to liabilities and assets are closed | There is no account closure when revaluation happens |
| Records | Records all the Liabilities and assets | Records liabilities and assets whose value changed over a period. |
Question - 7 : - Explain the process of dissolution of a partnership firm?
Answer - 7 : -
Dissolution of a partnership firm results in the business being discontinued. Dissolution consists of disposing off assets, clearing payment for liabilities and distributing the profit or loss among all partners.
A firm may be dissolved by the following ways:
1. Dissolution by agreement which can be with consent of all partners or a contract between all partners.
2. Dissolution which becomes compulsory when all partners become insolvent or any changes in government policies making the business illegal.
3. Dissolution that is based on certain condition such as a fixed period, purpose, death of a partner or insolvency of a partner/partners
4. Dissolution by a written notice given by a partner with the intention to dissolve the firm.
5. Dissolution by court on account of a partner becoming lunatic, indulged in illegal activities, found guilty of misconduct, incapable to perform duties or dissolution reason found justified.
Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of Partnership Act, 1932.
1. Amount which is received on sale of assets should be used in the following order
i. Paying off all external expenses and liabilities
ii. Loans and advances that are owed to partners should be cleared.
Iii.Capitals of all the partners should be paid off.
Any amount that still remains after paying off all these items should be distributed among partners of the dissolute firm in their original profit sharing ratio.
2. In case of loss and capital deficiency, the following should be paid in order:
i. Adjust loss and capital deficiency against profits of firm
ii. Adjust against the total capital of the firm
iii. If there exists any loss or deficiencies after all the adjustments, the next course of action will be to bear the loss as per individual profit sharing ratio.
Question - 8 : - What is a Realisation Account?
Answer - 8 : -
When a firm is dissolved, it results in closing of all accounts, assets are sold off and liabilities are paid off. To maintain a record of all such activities, a nominal account is prepared which is called as Realisation Account. Its main purpose is to determine profit or loss that happens due to settling off assets and liabilities. If this exercise results in profit or loss, it gets transferred to the Partners’ Capital Account with their original profit sharing ratio.
The main objectives of preparing a realisation account is:
1. To ensure all accounts are closed
2. To record all transactions that is related to sale of assets and paying off liabilities
3. Determining whether profit or loss is happening due to sale of assets and paying off liabilities.
The format of realisation account is as follows:
| Format of Realisation Account | | |
| Dr. | Cr. | | |
| Particulars | Amount ₹ | Particulars | Amount ₹ | | |
| Various Assets (Excluding Cash/Bank, fictitious assets, Debit balance of P and L A/c, partner Capital A/c, Current A/c, Loan to Partner) Cash/Bank (Payment for realisation expenses) Cash/Bank (Payment to outside and unrecorded liabilities) Partner’s Capital A/c (If any liability taken on expenses paid by him or remuneration payable to him) Partner Capital A/c (Profit on realisation distributed in the profit sharing ratio among all the partners) | – – – – | Various Liabilities (Excluding Partner Capital account, reserves, P and L A/c, Current A/c, Loan to Partner) Provision on assets (like, Provision for doubtful debts; Provision for depreciation) Cash/Bank (Amount received from realisation of assets and unrecorded assets) Partner ‘s Capital A/c (If any asset taken over by any partner) Partner Capital A/c (Loss on realisation borne by all the partners in their profit sharing ratio) | – – – – | | |
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Answer - 9 : -
| Format of Realisation Account | | |
| Dr. | Cr. | | |
| Particulars | Amount ₹ | Particulars | Amount ₹ | | |
| Various Assets (Excluding Cash/Bank, fictitious assets, Debit balance of P and L A/c, partner Capital A/c, Current A/c, Loan to Partner) Cash/Bank (Payment for realisation expenses) Cash/Bank (Payment to outside and unrecorded liabilities) Partner’s Capital A/c (If any liability taken on expenses paid by him or remuneration payable to him) Partner Capital A/c (Profit on realisation distributed in the profit sharing ratio among all the partners) | – – – – | Various Liabilities (Excluding Partner Capital account, reserves, P and L A/c, Current A/c, Loan to Partner) Provision on assets (like, Provision for doubtful debts; Provision for depreciation) Cash/Bank (Amount received from realisation of assets and unrecorded assets) Partner ‘s Capital A/c (If any asset taken over by any partner) Partner Capital A/c (Loss on realisation borne by all the partners in their profit sharing ratio) | – – – – | | |
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Answer - 10 : -
Deficiency of creditors arises when a firm is unable to pay off the creditors after selling of all the assets and utilizing partner’s private assets. In such a situation there are two procedures that needs to be followed:
1. Transferring deficiency to Partners’ Capital Account: In this procedure creditors get paid from the cash available with the firm that includes each partner’s individual contribution. The deficiency is transferred to Partners capital account and therefore is managed by all partners as per their profit sharing ratio. In case a partner becomes insolvent, it is regarded as capital loss for the firm. If the partnership deed has no clause for such a situation, then the capital loss needs to be borne by partners who are in solvent state and as per their capital ratio in the firm, as per Garner vs. Murray case.
2. Transferring the deficiency to Deficiency Account: In this process, a separate account is prepared for creditors. Then for determining the cash obtained from sale of firms and partners private assets, a cash account is prepared. Then after determining the cash available with the firm, creditors and external liabilities are paid, but not in full. The remaining creditors or the deficiency is then transferred to the deficiency account.