Accounts Ch - 5 Class 12th ( Dissolution of a Partnership Firm )

 Ch - 5 ( Dissolution of a Partnership Firm )

Meaning ⇾Dissolution of Partnership Firm means  The Firm close down its business and comes to its end . On the dissolution of the Firm, the Firm sold its assets and paid its liabilities and the balance amount ( if any ) be given to partners.

  Dissolution of Partnership ( Reconstitution of Partnership firm )

⇾ Change in ratio

⇾ Admission of a partner

⇾Death/ Retirement of a partner

⇾Amalgmation of two Partnership Firm

Mode of The Dissolution of a partnership  firm :

(A) Without the Intervention of Court

1.  Sec.40( By Mutual at 1932 Agreement )

2. Sec 41 ( Compulsory Dissolution )

( a)  When all or all but one partner became

      insolvent .

(b)When Business of the partnership Firm become unlawful.

3. Sector 42( On the Happening of any Event)

( a ) When a Partner becomes insolvent..

(b) When The Fulfillment of the object 

      for which a firm in formed.

(c) When the expiry of period of which 

        a firm in formed .

 

 (B) By the Order of Court ( Sec. 44 ) 

✱Settlement of Accounts on the Dissolution of Partnership Firms

Section 48 of the India Partnership Act 1932 Specify the modes of

the Settlement of the dissolution of partnership Firm.

1  If there in any loss of the firm including the deficiency of capital 

    will be paid out of Firm profit next out of Capital and at last if

    necessary realized from partners in their profit sharing ratio.

2. Amt. realized on sale of Assets ( Including the contribution of 

    partner's capital ) Shall be used in the following order and

    manner. 

 (a) First of all outside debts will be paid .

(b) After that the loan advanced by the partner's to Firm.

(c) Partner's Capital Account ( Payment To Partner)

(d) If the balance remains , distribute among the partner's 

    in their profit sharing ratio .

Accounting Procedure on the Dissolution of Partnership Firm.

1. Realization Account.

2. Partner's  Loan A/C 

3. Partners Capital A/c

4. Cash/ Bank A/c

1.) Realization Account ⇾

 Realization account is opened for disposing of assets and making the payments of all creditors  ( liabilities ) 

It is nominal account and prepaid for the object of knowing the profit or loss on the sale of assets and payments of Liabilities.

 

Procedure of Realization Account .

1. For Closing the Assets Account ⇾ all the assets ( Except The Dr. Balance of P& L A/C , Fictitious Assets ,cash and Bank balance ) transferred to Realization A/C at their book value.

    Realization A/c  Dr.

       To Assets A/c 

There are some points  which are keep in mins. 

 (1.) Only Those assets which can be converted into cash transferred into Realization A/c

 

Dr. Balance of P& L A/c and fictitious Assets (Advertisement) cannot so realized into Cash So don't be transferred into realization A/c Such Accounts be transferred to Partner's Capital/Current A/c in their profit sharing ratio.

Partner's Capital A/c      Dr.

   To Dr. Balance of P&L A/c 

   To Fictitious Assets A/c 

( In old profit sharing ratio)

(2.) Assets transferred to Realization A/c at their Gross value not Net Value .

Realization A/c   Dr.

  To Debtors A/c    

Provision for Debtors A/c  Dr.

  To Realization  A/c

2. For Closing Of liabilities Accounts⇾

Sundry Liabilities A/c   Dr.

   To Realization A/c

( At Book value )

Some Important Points

(1). Only outside liabilities transferred to Realization A/C .

(2.)Partner's Loan A/c , Partner's capital A/c and general Reserve  not to be transferred to 

     Realization A/c

(3.)  Reserves / Provisions -

(a)  Simple Reserve / General Reserves = Such reserve be distribute among the partner's in their profit           sharing Ratio.

     

 General Reserves A/c        Dr. 

 Cr. Balance P&L A/c         Dr.

 Accumulated Profit A/c     Dr. 

Contingency Reserve A/c  Dr.

      To Partner's Profit 's A/c

( In their Profit sharing ratio)

(b) Specific Reserve / Provisions = 

1.) Specific Reserves / Provision related to Particular Assets/Assets.

Provision for doubtful Debts A/c  Dr.

Provision for Discount for Debtors A/c  Dr. 

Provision for Depriciation A/c  Dr.

Machinery Replacement Reserve A/c Dr.

Investment Fluct. Reserve A/c  Dr.

  To Realization A/c 

2.) Specific Reserve which are  not related to any Assets like Workmen Compensation Reserve.

Workmen Compensation Reserve ( W.C.R ) -

Case (1) When there is no claim against W.C.R. Such Reserve be distributed among the partners in their profit sharing Ratio. 

                                                    W.C.R. = 1,00,000 Rs. 

                                                 A:B:C

                                                 2:1:2

W.C.R. A/c      Dr. `1,00,000

To A's Capital A/c            40,000

To B's Capital A/c            20,000

To C's Capital A/c            40,000

Case (2) If claim regarding the W.C.R is given but that is less than the W.C.R. .

     For Example : Claim regarding W.C.R. 80,000

                            W.C.R. A/c      Dr.1,00,000

                              To Realization A/c      80,000

                               To A's Capital A/c      8,000

                              To B's Capital A/c       4,000

                               To C's Capital A/c      8,000 

Case (3) Realized from Assets

 (a) Assets said for Cash 

      Cash/Bank A/c     Dr. 

        To Realization A/c

 

(b) Firm's Assets taken over by any partner

     Partner's Capital A/c   Dr.

       To Realization A/c

(c) If an Assets is given away to a creditors in a part or full payment of his dues , on agreed amount of assets is deducted from his claim and the balance is paid to him .

  

   No entry takes place of the transfer of assets to creditors . 

   (a ) If their is full settlement of Assets and Creditors.

   Sol..           No entry take place .

  

  (b) If their is no full Settlement . Assets = 1,00,000 and Creditors = 80,000

  Sol.    Cash/ Bank A/c  Dr.  20,000

                To Realization A/c         20,000

For Example⇾  Assets -  1,00,000 

        Creditors -  80,000   Settled at 70,000

   Cash/Bank A/c   Dr. 30,000

      To Realization A/c               30,000

Special Note.If their is no realized value of any Assets is given in the question it will be assumed valueless.

Case (4)  Payment of liabilities

 

(a) Liabilities Paid in cash

 

   Realization A/c Dr.

      To Cash And Bank A/ c

(b) Firm's liability paid by any partner             

             Realization A/c Dr.                               

               To Partner's Capital A/c

                           

(c) If an Assets is given away to Creditors 

        Realization A/c Dr.

          To Cash/Bank A/c

                 

Special Note -
If question is silent about the payment amt. of any liabilities, We assume such liability is paid at book value.

Case (5) Unrecorded Assets

 

 Such Assets don't be transferred to Realization A/c because there is no balance of such assets in the       books. But the amount realized from such Assets are recorded as usual like other Assets .

Case (6) Unrecorded liabilities

 

 Such liabilities don't be transferred to Realization A/c because their is no balance of such will be made so usual like other liabilities .

For Payment of Realization Expenses (Dissolution Expenses)

1. When Realization Expenses are paid by the firm .

      Realization A/c  Dr.

        To Cash/Bank A/c

               

2. When Realization Expenses are paid by the Partner on the behalf of the firm.

        Realization A/c   Dr.

           To Partner's Capital A/c

 

3. When the Firm has agreed to pay fixed amount to the partner to words realization expenses and              Partner has agreed to born the Expenses.

         Realization A/c Dr

            To Partner's Capital A/c

 

4. When Realization Expenses are  by the partner but paid by the Firm. 

       Partner's Capital A/c Dr.

         To Cash/Bank A/c

5. If Realization Expenses are Born and Paid by the partner out of his pocket. 

     No Entry Takes Place

    Profit on Realization A/c

 Realization A/c  Dr.

   To Partners Capital/Current A/c

     ( In Profit Sharing Ratio )

    Loss on Realization A/c

  Partner's Capital / Current A/c  Dr.

    To Realization A/c

   (In Profit Sharing Ratio)

 

2.) Partner's Loan A/c

     Partner's Loan  A/c  Dr,

         To Cash/ Bank  A/c 

                                

3.)  Partner's Capital Account's 

(A) When Capital are Fluctuate So, We are made Partner's Capital A/c

    1.) When Partner's Capital Shows Credit Balance

          Partner's Capital A/c  Dr.

            To Cash/Bank A/c

   2.) When Partner's Capital Shows Debit Balance

          Cash/Bank  A/c  Dr.

            To Partner's Capital A/c 

(B) When Partner's Capital are Fixed So We are made both Partner's Capital & Current A/c.

       When the Capital of the partner's is fixed

✱Partner's Current A/c  =All the transaction which are affecting the partner's that will be recorded into     partner's Current A/c.After all adjustments the balance of Partner's Current A/c transferred to                 Partner's  Capital A/c

(a ) If partners Current A/c show the Credit balance.

Partners Current A/c     Dr

  To Partner's Capital A/c

(b) If partners Current A/c show the Debit balance.

 

  Partner's Capital  A/c  Dr.

    To Partner's Current A/c

✱ Partner's Capital

(a) If partners Capital A/c show the Credit balance.

    

  Partner's Capital A/c  Dr.

    To Cash/Bank A/c

(b)  If partners Capital A/c show the Debit balance.  

  Cash/Bank A/c  Dr.

    To Partner's Capital A/c