Dissolution of Partnership Firm

Dissolution of a partnership means discontinuance or cessation of partnership between all the partners of the firm. It means that firm closes down its business and comes to an end. In dissolution of partnership, assets and liabilities are revalued and revaluation account is prepared. Dissolution of partnership can be because of reconstitution of partnership and by mutual agreement where as dissolution of firm can be by the order of the court. The dissolution of firm can be by mutual agreement, compulsory dissolution, happening of contingencies or by order of court. In accounting for dissolution of firm, realisation account (nominal in nature) is prepared to ascertain profit or loss on sale of assets and discharge of liabilities, partner’s loan account, capital account and bank account is prepared. Loan from relative of any partner is an external liability, therefore transferred to realisation account.

Partner’s loan account is not transferred to realisation account as it is not the outside liability for the firm. The assets or liabilities taken by the partners are transferred to their capital accounts. Capital accounts are closed by transferring to cash/bank account. Partner’s current account is prepared in case of fixed capital accounts. The balance of current account is transferred to capital accounts of partners. Both sides of Cash/ Bank account shall be equal. In Dissolution of a firm, assets (except Cash/ Bank account) and liabilities are closed by transferring them at their book value to the realisation account. Sundry debtors are transferred at their gross value. Profit & Loss, general reserve and miscellaneous expenintiture account is transferred to partner’s capital account. Realisation account is closed by transferring the balance to partner’s capital/ current account. In case the question is silent is about realisation of any assets, it is assumed that asset has not realised anything where in case of liabilities, it is assumed that amount equal to book value is paid. Investment Fluctuation Reserve, Workmen Compensation Reserve and Provident Fund have specific accounting treatment.

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