Revision: Dissolution of Partnership Firm Accounts HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

• 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 A/c: Records asset sales and liability payments; shows profit/loss on dissolution.
• Capital A/c: Shows partner balances, adjusted for reserves and realisation results.
• Current A/c: Used under fixed capital method; balance moved to capital account.
• Loan A/c: Partner loans are repaid after outside liabilities; debit loans are adjusted via capital/current A/c.
• Cash/Bank A/c: Tracks all receipts and payments; final balance paid to partners.

1. For Transferring Assets to Realisation Account:

Realisation A/c            ...Dr.    (with book value or Balance Sheet value)

     To Assets A/c (Individually)

(Being a transfer of various assets at book value to the Realisation Account)

2. For Transferring Liabilities to Realisation Account:

Sundry Creditors A/c                                  ...Dr.

Bills Payable A/c                                        ...Dr.

Bank Overdraft A/c                                    ...Dr.

Outsider's Loan A/c (other than partner)    ...Dr.

Outstanding Expenses A/c                         ...Dr.

          To Realisation A/c

(Being a transfer of liabilities to the Realisation Account)

3. For Transfer of Provision Against Closing Assets:

Provision for Doubtful Debts A/c           ...Dr.

Provision for Discount A/c                     ...Dr.

Provision for Depreciation A/c               ...Dr.

Contingency Reserve A/c                       ...Dr.

Joint Life Policy Reserve A/c                 ...Dr.

Investment Fluctuation Fund A/c           ...Dr.

          To Realisation A/c

(Being a transfer of various provisions to the Realisation Account.)

4. For Transfer of Accumulated Profits and Reserves:

General Reserve A/c                             ...Dr.

Reserve Fund A/c                                  ...Dr.

Profit and Loss A/c (Credit balance)     ...Dr.

         To All Partners' Capital / Current A/c

(Being accumulated profit and reserves transferred to all partners' Capital / Current A/c in their profit-sharing ratio.)

5. For Transfer of Accumulated Losses:

All Partners’ Capital / Current A/c      ...Dr.

           To Profit and Loss A/c (Debit balance)

           To Advertising Suspense A/c

(Being accumulated loss transferred to all partners' Capital / Current A/c in their profit-sharing ratio)

A. If the Assets are sold for cash:

Cash / Bank A/c          ...Dr.

       To Realisation A/c

(Being assets sold for cash)

B. If the Assets are taken over by any partner:

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

         To Realisation A/c

(Being assets taken over by the partner)

C. For Payment of Liabilities:

1. For Payment to outsiders' liabilities (Third party):

Realisation A/c        ...Dr.

      To Cash/Bank A/c

(Being third party Liabilities paid)

2. If any partner discharges any liabilities of the firm:

Realisation A/c          ...Dr.

        To Partners Capital / Current A/c

(Being Liability taken over by a partner)

D. For Payment of Realisation Expenses:

1. Realisation Expenses is borne by the firm:

Realisation A/c         ...Dr.

      To Cash / Bank A/c

(Being Realisation expenses paid by the firm)

2. Realisation Expenses is borne by any Partner:

Realisation A/c          ...Dr.

        To Concerned Capital / Current A/c

(Being Realisation expenses paid by partner)

E. If commission is given to any Partner for realising assets:

Realisation A/c        ...Dr.

        To Partner’s Capital / Current A/c

(Being commission paid for realising the assets)

F. If Any Contingent Liability is paid (i.e. liability not included in the Balance Sheet):

Realisation A/c           ...Dr.

       To Cash / Bank A/c

(Being contingent Liability paid)

G. For Payment of Partner’s Loan:

Partner’s Loan A/c         ...Dr.

      To Cash / Bank A/c

(Being repayment of Partner’s loan)

A. For Closing Realisation Account:

1. For Transfer of Profit on Realisation Account:

Realisation A/c      ...Dr.

     To All Partners' Capital/Current A/c

(Being Profit on realisation transferred to all partners' Capital / Current Account in their profit sharing ratio)

2. For Transfer of Loss on Realisation Account:

All Partners’ Capital / Current A/c         ...Dr.

          To Realisation A/c

(Being loss on realisation transferred to all partners' Capital / Current Account in their profit sharing ratio)

B. For Closing Current Accounts:

1.If Current Account shows Credit Balance:

Partner’s Current A/c       ...Dr.

     To Partner’s Capital A/c

(Being a transfer of credit balance to the Partner’s Capital account)

2. If Current Account shows a Debit Balance:

Partner’s Capital A/c       ...Dr.

      To Partner’s Current A/c

(Being a transfer of debit balance to the Partner’s Capital account)

C. For Closing Capital Account:

1. As the Capital Accounts of the partners show a debit balance, the partner should bring in cash to settle his account with the firm. The entry is:

Cash / Bank A/c         ...Dr.

      To Partner’s Capital A/c

(Being amount due from the partner received)

2. If cash paid to Partner to settle the Capital Account:

Partner’s Capital A/c        ...Dr.

      To Cash / Bank A/c

(Being the amount due to partners paid as final settlement)

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

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)

                                                              Realisation Account

Dr.                                                                                                                                                         Cr.