Revision: Partnership Accounts >> Dissolution of a Partnership Firm Accounts ISC (Commerce) Class 12 CISCE

• Indian Partnership Act 1932, Sec. 39, provides that, "The dissolution of the partnership between all the partners of a firm is called the dissolution of a firm."
• "The act of process of ending an official organization or legal agreement."
• "The dissolution of partnership firm indicates the discontinuance function as a firm."

• Dissolution of a partnership firm means a change in the agreement; the business may continue. Dissolution of a firm means complete closure of business (Sec. 39).
• After the firm's dissolution, assets are sold, liabilities are paid, and the remaining balance is shared among partners.
• Modes of dissolution: Without Court Order and By Court Order.
• Without Court: Occurs by mutual agreement, partner insolvency, unlawful business, expiry of term, completion of venture, or notice if the partnership is at will.
• By Court: Happens if a partner is of unsound mind, permanently disabled, guilty of misconduct, breaches the agreement, the firm runs at a loss, or if the court finds it just and fair.

• First Payment – Dissolution Expenses: Expenses related to the dissolution process are paid first from the firm's assets.
• Second – Outside Liabilities: All dues to third parties (e.g., creditors, loans, bank overdrafts) are settled next.
• Third – Partners’ Loans: If any money remains, it is used to repay loans given by partners to the firm.
• Fourth – Capital Repayment: Remaining surplus, if any, is distributed to partners against their capital balances.
• Profit Sharing Ratio: Any final surplus is shared among partners as per the agreed profit-sharing ratio.

                                                              Realisation Account

Dr.                                                                                                                                                         Cr.

A. For Closing Assets Account: All assets of the firm (except Cash and Bank balance) are transferred to this account at book values.

Realisation A/c     ....Dr.

     To Sundry Assets A/c

(Assets transferred to Realisation A/c at Book Values)

B. For Transfer of Fictitious/Deferred Revenue Expenditure:

Partners' Capital A/cs    ...Dr.

     To Profit & Loss A/c

     To Deferred Revenue Expenditure A/c

(Balance of loss transferred to Partner's Capital A/cs in profit sharing ratio) 

C. For Closing Current Accounts:

1. In Case of Debit Balance:

Partner's Capital A/c    ...Dr.

     To Partner's Current A/c

2. In Case of Credit Balance:

Partner's Current A/c     ...Dr.

      To Partner's Capital A/c

D. For transfer of Provisions:

1. Provisions for Bad Debts A/c               ...Dr.

Provisions for Depreciation A/c               ...Dr.

Machinery Replacement A/c                    ...Dr.

Investment Fluctuation Fund A/c             ...Dr.

       To Realisation A/c

(Various reserves and provisions transferred to Realisation A/c)

Note: 

(i) Cash and Bank balance are not transferred to the realisation account.

(ii) Assets are always transferred to the realisation account at book values. 

1. For Closing Liabilities Accounts:

Sundry Liabilities A/c    ...Dr.

     To Realisation A/c

(Transfer of sundry liabilities to Realisation A/c) 

2. For Transfer of Undistributed Profits/Reserves:

General Reserve A/c           ...Dr.

Reserve Fund A/c                ...Dr.

Contingency Reserve A/c    ...Dr.

Profit & Loss A/c                ...Dr.

       To Partner's Capital A/cs

(Undistributed profits transferred to Capital A/cs) 

3. For Workmen's Compensation Reserve:

Workmen's Compensation Reserve A/c    ...Dr.

       To Partner's Capital A/cs

(Entire reserve transferred to Partners' Capital A/cs)

1. When assets are sold for cash:

Cash/Bank A/c    ...Dr.

     To Realisation A/c 

(Assets sold for Cash) 

2. When an asset is taken away by one of the partners:

Partners' Capital A/c    ...Dr.

         To Realisation A/c 

(Assets taken over by partner) 

3. When the assets are given to any of the creditors towards the payment of his dues. : No Entry

1. When expenses are paid by the firm:

Realisation A/c     ...Dr.

     To Cash/Bank A/c

(Liabilities paid in cash) 

2. When realisation expenses are paid by a partner on behalf of the firm:

Realisation A/c    ...Dr.

     To Partners' Capital A/c

(Partner agreed to pay a liability) 

A. Remuneration paid to a partner (excluding realisation expenses)

Realisation A/c           ...Dr. 

      To Concerned Partner's Capital A/c

(Being the remuneration credited to Partner's Capital Account)

B. Realisation Expenses borne and paid by the firm

Realisation A/c            ...Dr.

        To Cash/Bank A/c

(Being the realisation expenses paid by the firm)

C. Realisation Expenses borne by the firm but paid by a partner

Realisation A/c            ...Dr.  

        To Concerned Partner's Capital A/c  

(Being the realisation expenses paid by the partner on behalf of the firm)

D. Realisation Expenses borne by the firm, partly paid by the firm and balance by the partner 

Realisation A/c            ...Dr.  

        To Cash/Bank A/c                   [Amount paid by the firm]  

        To Concerned Partner's Capital A/c [Amount paid by the partner]

(Being the realisation expenses paid by both the firm and the partner)

E. Realisation Expenses borne and paid by the partner: No Entry  

F. Partner is paid remuneration, and realisation expenses are met by the firm

1. Realisation A/c              ...Dr.  

       To Concerned Partner's Capital A/c

(Being remuneration payable to the partner)

2. Realisation A/c              ...Dr.  

        To Cash/Bank A/c  

(Being realisation expenses paid by the firm)

G. Partner is paid remuneration and an agreed amount as realisation expenses:

Realisation A/c      ...Dr.

     To Concerned Partner's Capital A/c

(Being remuneration and agreed realisation expenses credited to the partner's capital Account)

1. If the firm pays realisation expenses on behalf of the partner:

      To Cash/Bank A/c

(Being realisation expenses paid by the firm on behalf of the partner)

2. If the partner pays it himself: No Entry

(Already included in the agreed amount credited to Capital A/c)

H. Partner is paid a fixed amount, including remuneration and realisation expenses:

1.Realisation A/c         ...Dr.

     To Concerned Partner's Capital A/c

(Being a fixed amount, including realisation expenses credited to the partner)

2. If the firm pays realisation expenses on behalf of the partner:

Concerned Partner's Capital A/c     Dr.

        To Cash/Bank A/c

(Being realisation expenses paid by the firm on behalf of the partner)

3. If the partner pays it himself: No Entry  

(Already covered in the fixed amount credited)

1. When realisation account discloses profit (in case credit side is more than the debit side):

Realisation A/c    ...Dr.

      To Partners' Capital A/cs

(Transfer of profit on Realisation to Partners' Capital A/cs) 

2. When realisation account discloses loss (in case debit side is more than the credit side):

Partners' Capital A/cs     ...Dr.

       To Realisation A/c

(Transfer of loss on Realisation to Partners' Capital A/cs)

Partner's Loan A/c      ...Dr.

        To Cash/Bank A/c

1. For loan to Partner being transferred to Capital Account:

Partner's Capital A/c     ...Dr.

      To Loan to Partner A/c

2. For Loan to Partner being received in Cash or by Cheque:

Cash/Bank A/c     ....Dr.

        To Loan to Partner A/c

A. Opening Capital Accounts: No Entry

B. Transfer of Current Account Balances (under Fixed Capital Method)

1. If there's a debit balance in Current Account:

Concerned Partner’s Capital A/c     Dr.

       To Concerned Partner’s Current A/c

(Being debit balance in current account transferred to capital account)

2. If there's a credit balance in Current Account:

Concerned Partner’s Current A/c     Dr. 

      To Concerned Partner’s Capital A/c

(Being a credit balance in current account transferred to capital account)

C. Transfer of Reserves and Profit & Loss Balances

1. For Credit Balances (Profits, Reserves):

Profit & Loss A/c (Cr. Balance)     Dr.  

Reserve A/c                         Dr. 

       To Partners’ Capital A/cs

(Being credit balances transferred to partners’ capital accounts in the profit-sharing ratio)

2. For Debit Balances (Accumulated Losses, Fictitious Assets):

Partners’ Capital A/cs              Dr.

      To Profit & Loss A/c (Dr. Balance)

      To Deferred Revenue Expenditure A/c

(Being debit balances/losses transferred to partners’ capital accounts in profit-sharing ratio)

D. Loan Given to a Partner

Partner’s Capital A/c               Dr.

        To Loan to Partner A/c

(Being partner’s loan transferred to his capital account)

E. Transfer of Profit or Loss on Realisation

1. If there is a Profit on Realisation:

Realisation A/c                     Dr.

        To Partners’ Capital A/cs

(Being profit on realisation transferred to partners’ capital accounts)

2. If there is a Loss on Realisation:

Partners’ Capital A/cs              Dr. 

       To Realisation A/c

(Being loss on realisation transferred to partners’ capital accounts)

F. Final Settlement with Partners:

1. Partner brings cash for the deficiency in capital (debit balance):

Cash/Bank A/c                       Dr. 

       To Partners’ Capital A/cs

(Being cash brought in by partner for deficiency in capital)

2. Payment made to partners (credit balance):

Partners’ Capital A/cs              Dr.

       To Cash/Bank A/c 

(Being final payment made to partner for balance in capital account)

• Cash/Bank A/c must close with a zero balance after settling partner claims.
• Debit side: Opening balance, sales, and capital brought in.
• Credit side: Payments of liabilities, expenses, partner dues.
• Use only one account (Cash or Bank) – transfer balance if both are given.
• Loan taken → via Cash/Bank A/c; Loan given → debit to Capital A/c.

A. If Goodwill Appears in the Balance Sheet:

1. Transfer of Goodwill to Realisation Account:

Realisation A/c          ...Dr.

        To Goodwill A/c

(Being goodwill transferred to Realisation Account)

2. If Goodwill is Realised on Dissolution:

Cash / Bank A/c         ...Dr.

       To Realisation A/c

(Being goodwill realised in cash)

B. If Goodwill Does Not Appear in the Balance Sheet:

1. If Goodwill is Realised on Dissolution:

Cash / Bank A/c         ...Dr.

        To Realisation A/c

(Being goodwill realised though not recorded earlier)

2. If a Partner Purchases Goodwill:

Partner’s Capital / Current A/c        ...Dr.

          To Realisation A/c

(Being goodwill taken over/purchased by a partner)

1. For realisation from unrecorded assets:

Cash/Bank A/c    ...Dr.

       To Realisation A/c

( Being the sale proceeds of unrecorded asset credited to Realisation Account)

2. For payment of unrecorded liability:

Realisation A/c     ....Dr.

      To Cash/Bank A/c

(Being the payment of unrecorded liability debited to Realisation Account)

3. If a partner takes an unrecorded asset:

Concerned Partner's Capital A/c     ...Dr.

      To Realisation A/c

4. If a partner undertakes to pay an unrecorded liability:

Realisation A/c     ...Dr.

      To Concerned Partner's Capital A/c

5. If unrecorded asset is given to settle a recorded liability: No Entry

6. If unrecorded liability is settled through recorded asset: No Entry

7. If unrecorded asset is given to settle unrecorded liability: No Entry