Dissolution of Partnership

Q. What is meant by dissolution of a partnership and Partnership firm? Distinguish between them.

Ans: Dissolution of a partnership means the termination of connections with the firm by some of the partners of the firm, and remaining partners of the firm continuing the business of the firm under the same firm’s name under an agreement. Hence, admission, retirement and a death of a partner are considered dissolution of partnership.

                Dissolution of a firm means the complete closing down of the business of the firm.  That means all the assets of the firm are disposed off, liabilities are paid off and the accounts of all the partners are settled.

Difference between dissolution of partnership and dissolution of firm.

Basis of distinction	Dissolution of partnership	Dissolution of firm
(a)    Relation ship among all partners	Relation ship among all partners does not come to an end.	Relation ship among all partners does not come to an end.
(b)    Continuation of business	Business of the firm may continue.	Business of the firm does not continue.
(c)     Inter relationship	Dissolution of partnership may or may not result in dissolution of the firm.	Dissolution of the firm necessarily results in dissolution of partnership.

Q. What are various modes for dissolution of Partnership?

Ans: The dissolution of partnership between all the partners of a firm is called the "dissolution of the firm". A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

Modes Of Dissolution Of A Partnership Firm:

The Indian Partnership Act, 1932 provides that a partnership firm may be dissolved in any of the following modes:

i.         Compulsory dissolution;

ii.       Dissolution on the happening of certain contingencies;

iii.      Dissolution by notice of partnership at will;

iv.     Dissolution by the court.

                i) Compulsory Dissolution: A firm is dissolved by the adjudication of all the partners or of all the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.

                However, where more than one separate venture or business or undertaking is carried on by the firm, the illegality of one or more ventures or businesses or undertakings shall not by itself cause the dissolution of the firm in respect of its lawful ventures, businesses and undertakings.

                ii) Dissolution On The Happening Of Certain Contingencies: Subject to contract between the partners, a firm is dissolved:

i.         if constituted for a fixed term, by the expiry of that term;

ii.       if constituted to carry out one or more adventures or undertakings, by the completion thereof;

iii.      by the death of a partner; and

iv.     by the adjudication of a partner as an insolvent.

                iii) Dissolution By Notice Of Partnership At Will: Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
                The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

               (iv) Dissolution by Court: A court may order a partnership firm to be dissolved in the following cases:

i.         When a partner becomes of unsound mind

ii.       When a partner becomes permanently incapable of performing his/her duties as a partner,

iii.      When partner deliberately and consistently commits breach of agreements relating to the management of the firm;

iv.     when a partner’s conduct is likely to adversely affect the business of the firm;

v.       when a partner transfers his/her interest in the firm to a third party;

vi.     When the court regards dissolution to be just and equitable.

Q. What is a Realisation Account? How is a Realisation Account prepared?

Ans: Realisation Account is a nominal account. It is prepared to find out profit or loss on realisation of assets and payment of liabilities when a firm is dissolved. Any profit or loss on realisation is transferred to the capital accounts of all the partners in their profit sharing ratio.

Realisation Accounts is prepared in the following manner:

i.         All the realisable assets given in the books of the firm are entered at their book values on the debit side of the Realisation Account

ii.       All the external liabilities are entered at their book values on the credit side of the Realisation Account

iii.      On the realisation of assets, the actual amount of cash received is entered on the credit side of the account. - Cash/bank account is debited

iv.     On the payment of liabilities, the actual amount of cash paid is entered on the debit side of the account. Cash/bank account is credited

v.       Realisation expense if any, is also debited to the Realisation Account and bank account is credited

vi.     After making the above entries in the Realisation Account, the account is balanced. The profit or loss on realisation is transferred to the capital accounts of all the partners in their profit sharing ratio.

Q. How the accounts of partnership firm settled in case of dissolution of partnership?

Ans: Settlement of Accounts on Dissolution

                At the time of dissolution of the partnership the main question that arises is the settlement of accounts of the various parties like creditors, bank loans, partners' loans, partners' capital accounts. This issue has been dealt in detail by the section 48, 49 and 55 of the Partnership Act. The account of all these parties will be settled as under:

                1) If there is any Loss or Deficiency of capital it would be first paid out of the profits of the firm and then out of the Capital of the partners and if still any balance remains it would be realised from the Partners privately in their profit sharing ratio.

                2) The amount realised from the sale of the assets of the firm, debtors and the amount contributed by the partners if any would be applied in the following manner:

                a) Outside liabilities would be paid first which includes Creditors, Bills payables, Outstanding expenses, Bank Loans or outsiders' Loans (including the loans provided by the relatives of the partners), Employees Compensations or provident funds etc.

                b) Thereafter the Loans advanced by Partners to the firm will be paid off.

                c)  Thirdly the Partners' Capital accounts will be settled.

                d) The balance left if any will be distributed among the partners in their profit sharing ratio. 

Q. Explain the principle of Garner Vs. Murray. Explain the accounting treatment when the firm is dissolved due to insolvency of one partner between more than two partners.

Ans: In the case of Garner Vs. Murray, Lord Justice Joyce gave the following decision:

i.         Loss on realisation considered being ordinary loss and therefore to be shared by all the partners according to their profit sharing ratio.

ii.       Solvent partners to bring cash equal to their share of loss on realisation

iii.      Loss on account of deficiency of insolvent partner considered being capital loss; therefore   to be shared by solvent partners according to their last agreed capital.

Last Agreed Capital means

                1. In case of Fixed Capitals - Fixed Capital (as given in the Balance Sheet) without any adjustment

                2. In case of Fluctuating Capitals - Capital after making adjustments for past accumulated reserves, profits or

losses, drawings, Interest on capital, Interest on Drawing, remuneration to a partner etc. to the date of dissolution

but before making adjustment for profit or loss on realisation.

When there are more than two partners and one becomes insolvent, the solvent partners are liable to bear the loss of insolvent partner. The loss is borne by the solvent partners in the following partners:

i.         When Garner Versus Murray rule is not applicable, the solvent partners are supposed to bear the loss according to the profit sharing ratio.

ii.       When the Garner versus Murray rule is applicable, the solvent partners are liable to bear the loss of insolvent partners according to the current capital ratio.

Q. What do you mean by amalgamation? Specify the different types of firms between whom amalgamation takes place. What is the consequences/result of amalgamation?
Ans: Amalgamation of firms takes place when two or more firms working independently merge their business into a single unit. The firms engaged in identical business combine their business activities and form into a new firm know as amalgamated firm.

Amalgamation may take place between:
                (1) Two or more sole trading concerns.
                (2) One or more sole trading concerns and a partnership firm.
                (3) Two or more partnership firms.
                (4) Any other type of firms with any permutation combination.

The result of amalgamation is that the combining units lose their independent identity (either as a sole trading concern or as old partnership firm) and the proprietors or the partners of the combining firms become the partners of the new firm.

Q. What are the objectives of amalgamation? Describe the process of amalgamation.
Ans: Objectives of amalgamation are:
                (1) To achieve the economies of large scale operations.
                (2) To avoid cut throat competition.
                (3) To increase capital.
                (4) To enhance the efficiency of the firm by utilising the different talents of the partners.
                (5) To maximize profits to economies of production.
                (6) To minimize the cost of production to large-scale production.
                (7) To establish monopoly in a particular trade.

The process of amalgamation involves two stages of operations: 
                (1) Closing down the amalgamating firms, which have agreed to merge. For this purpose the assets & liabilities of the amalgamating firms should be revalued to ascertain the worth of capital to be transferred to the new firm.
                (2) Opening the books of the new firm.