NOTES

CHAPTER 7: Dissolution of Partnership Firm

Reasons for dissolution of a firm:

• Due to continued losses.
• When court orders dissolution.
• At the will of any partner in case of general partnership.
• On the insolvency of all the partners.
• On the expiry of term or objectives.

Example 1:

Pass the journal entries for following transactions on the dissolution of a firm of partners A & B:

1. Old furniture which had been written off in the books was sold for Rs. 40,000.
2. There was old machinery which had been written off in the books. It was estimated to realise Rs. 5,000 which was taken by B at the estimated price less 30%.
3. Investments book value Rs 50000 realised at 120%.
4. Debtors Rs. 2,64,000. Provisions for doubtful debts Rs. 24,000, Rs. 48,000 of the books debts proved bad.

Solution:

Journal

Date	Particulars	L.F.	Debit	Credit
	Bank A/c Dr.  To realisation A/c		40,000	40,000
	B’s capital A/c Dr.  To realisation		3,500	3,500
	Bank A/c  (50,000 × 120/100) Dr.  To realization A/c		60,000	60,000
	Bank A/c (2,64,000 − 48,000) Dr.  To realisation A/c

Example 2:

X, Y & Z were partners sharing profits in the ratio of 2 : 1 : 1. Their balance sheet as on 31.3.2018

Liabilities	Amount	Asset	Amount
Capital A/c  X  Y  Z Reserves Creditors Bills payable	30,000 20,000 20,000 4,000 5,700 2,300	Machinery Joint life policy Stock Debtors Less : provision Bills receivable Cash in hand	50,000 4,000 20,000 7,000 (400) 400 1,000
	82,000		82,000

The firm was dissolved on the above date:-

• X took over the joint life policy at Rs. 5,000.
• Stock realised Rs. 22,000.
• Debtors realised Rs. 4,000.
• Machinery was sold for Rs. 58,000.
• Bill on hand realised in full. One bill for 500 under discount was dishonoured and had to be paid by the firm.

Prepare realisation account and capital accounts of partners.

Solution:

Realisation Account

Particulars	Amount	Particulars	Amount
To machinery A/c To joint life policy A/c To stock A/c To debtors To bills receivable To cash A/c  Dishonor of bill 500  S creditors 5,700  Bills payable 2,300 To partner’s capital A/c (realisation A/c)  X 3,950  Y 1,975  Z 1,975	50,000 4,000 20,000 7,000 400       8,500         7,900	By provision for bad debts By creditors By bills payable By cash A/c Stock 22,000 Debtors 4,000 Machinery 58,000 B/R 400 By X’s capital A/c (joint life policy taken over)	400 5,700 2,300         84,400 5,000
	97,800		97,800

Capital A/c

Dr.				Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
By realisation A/c Joint life policy taken over By bank A/c	5,000 30,950	------- 22,975	----   22,975	By bal b/d By realisation A/c By reserve A/c	30,000 3,950 2,000	20,000 1,975 1,000	20,000 1,975 1,000
	35,950	22,975	22,975		35,950	22,975	22,975

Cash A/c

Particulars	Amount	Particulars	Amount
To bal b/d To realisation A/c Stock 22,000 Debtors 4,000 Machinery 58,000 Bills receivable 400	1,000         84,400	By realisation A/c Dishonor of bills 500 S creditors 5,700 Bills payable 2,300 By partners’ capital A/c  X 30,950  Y 22,975  Z 22,975	8,500       76,900
	85,400		85,400

Difference between dissolution of firm and partnership

S.No.	Dissolution of firm	Dissolution of partnership
1.	It means end of all contractual relationship among the partners.	It means change in relationship between partners.
2.	The firms business is closed by realizing all assets and discharging all liabilities.	The firms business is not closed only the assets and liabilities are revalued.
3.	It happens only once in the life of a firm.	It may happen any number of times in the life of a firm.
4.	It is wider term and includes dissolution of a partnership.	It is narrow term and does not include dissolution of firm.
5.	Accounts required are realisation account capital account and cash or bank account.	Revaluation accounts, capital accounts, and balance sheet are prepared.

Example 3:

Pass the journal entries for the following transactions in the books of A, B & C sharing profits in the ratio of 3 : 2 : 1 at the time of dissolution of the firm.

1. Realisation expenses of Rs. 3,500 were to be borne by and also to be paid by A partner.
2. B was given a loan of Rs. 30,000 by the firm.
3. C a partner took a machinery for 10,000.
4. Loss on dissolution was Rs. 4,000.
5. Bank loan Rs. 50, 000 was paid.

Solution:

 

Journal

Date	Particulars	L.F.	Debit	Credit
	No entry for realisation expenses
	Bank A/c Dr.  To loan A/c		50,000	50,000
	C’s capital A/c Dr.  To realisation A/c		10,000	10,000
	A’s capital A/c Dr. B’s capital A/c Dr. C’s capital A/c Dr.  To realisation A/c		2,000 1,333 667	4,000
	Realisation A/c Dr.  To bank A/c		50,000	50,000