Dissolution of Partnership Firm

Meaning The complete end of the partnership business.

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Condition of preparing Accounts on Dissolution of Firm:

Complete Balance sheet of the firm.

Memorandum Balance Sheet.

Using C+L=A

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  1. No old or new PSR, Gaining Ratio/ Sacrifice Ratio.
  2. No special treatment of Goodwill
  3. Balance Sheet is not to be prepared as all account balances become nil after this process.

Realization Account is a nominal account prepared for the purpose of calculating and distributing the profit/loss arising out of realization of assets and repayment of liabilities, at the time of dissolution of a partnership firm.

Accompanied by: Capital accounts, Bank account, partners’ loan account.

Steps in preparing various accounts:

  1. First of all Transfer the items of Balance Sheet to the concerned accounts as mentioned here.
  2. Then Complete Realisation Account.
  3. Complete Capital Accounts of the partners.
  4. Then complete the Bank Account.
  5. Bank account should be left with nil balance.

Items of Balance Sheet:

LiabilitiesAmountAssetsAmount
Outside LiabilitiesCash in/at hand/Bank
Loan by Partner(s)Current Assets
Reserves and Accumulated Profits Fixed Assets
Partners' Current A/c(s) Accumulated losses
Partners' Capital A/cs Partners' Current A/c(s) 
Equal Equal

 

 Items of Balance Sheet should be transferred to various accounts as under:

LiabilitiesTransferred to
Outside LiabilitiesRealisation A/c (Credit side)
Loan by Partner(s)Partner's Loan A/c (Credit side)
Reserves and Accumulated profits,                      Partners' Current A/c(s)                                                    Partners' Capital A/csPartners' Capital A/cs (Credit side)
AssetsTransferred to
Cash in/at hand/BankBank A/c (Debit side)
Current  Assets                                                                    Fixed AssetsRealisation A/c (Debit side)
Accumulated losses                                                              Partners' Current A/c(s)Capital A/c Dr. (Debit side)

 

All items appearing on assets side of the firm’s balance sheet, other than cash, bank balance, accumulated losses, loan to a partner, current account (debit) are transferred to the debit side of realization account, at book values.

But Debtors must be transferred at Gross value and the Provision for Doubtful Debts be transferred on Credit side of Realisation Account.

All items appearing on liabilities side of the firm’s balance sheet, other than accumulated profits, partner’s loan and capital and current accounts are transferred to the credit side of realization account, at book values.

Assets transferred to the debit side of Realization account can be

a) sold off,

b) taken over by a partner or

c) can be used to pay off a liability.

Liability transferred to the credit side of Realization account can be

a) paid off,

b) assumed by a partner or

c) can be set off against an asset.

If asset is used to pay off a liability, there is no corresponding treatment except for the net payment paid/received in cash/bank which must be shown in realization account.

* Workmen Compensation Reserve, should be transferred to the credit side of Realization account to the extent of the concerned liability. Excess of this reserve can be directly transferred to the credit side of Partners capital accounts in their profit sharing ratio.

Investment Fluctuation Reserve must be transferred to credit side of Realisation Account.

** Employees Provident Fund must be transferred to the credit side of realization account as it is for definite liability to be paid to the employees.

*** Loss on realization is shown on the credit side.

 

For Realisation Account, Capital Accounts and Bank Account, Check:

Accounts relating to Dissolution

Realisation expenses, Check:

Realisation Expenses

 

For Journal Entries:

12 Journal Entries on Dissolution of Partnership Firm

For a collection of Journal Entries on Dissolution, as set in Final Exams.

38 Journal Entries on Dissolution of Partnership Firm in Exam.

Class 12 Accountancy MCQs Dissolution of Partnership Firm