Class 12 Accountancy Notes
Unit – 4: Dissolution of Partnership Firms
Q.1. What do you mean by Dissolution
of Partnership and Dissolution of Partnership Firm? Distinguish between them. 2012, 2015, 2018,
2020
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. The dissolution of partnership may take place in any of the
following ways:
a) Change in
existing profit sharing ratio among partners;
b) Admission
of a new partner;
c) Retirement
of a partner;
d) Death of a
partner;
e) Insolvency
of a partner.
Dissolution
of a firm means discontinuation of the firm’s business and termination of relationship
between the partners. According to Sec. 39 of Indian Partnership Act 1932,
“Dissolution of firm means dissolution of partnership between all the partners
in the firm."
Therefore when a firm is dissolved, assets of
the firm are disposed off, liabilities are paid off and the accounts of all the
partners are also settled.
Difference between dissolution of partnership
and dissolution of firm
Basis of
distinction |
Dissolution of
partnership |
Dissolution of
firm |
Relationship |
Relationship amongst all the partners does
not come to an end. |
Relationship amongst all the partners comes
to an end. |
Continuation of business |
Business of the firm may continue. |
Business of the firm does not continue. |
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. |
Books of accounts |
Books of accounts are not closed. |
Books of accounts are closed. |
Nature |
Dissolution of partnership is voluntary. |
Dissolution of partnership may sometimes
compulsory or sometimes voluntary. |
Account |
Revaluation account is prepared. |
Realisation account is prepared. |
Q.2. What are various mode of
dissolution of a Partnership Firm? Explain them briefly. 2011, 2014,
2016, 2019, 2020
Ans: Various modes of Dissolution of Firm: 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. The Indian Partnership Act, 1932 provides that a partnership firm may be dissolved in any of the following modes:
1. Dissolution without Court’s order:
(i)
Dissolution by agreement (Sec. 40)
(ii)
Compulsory dissolution (Sec. 41) 2010
(iii)
Dissolution on the happening of certain
contingencies (Sec. 42)
(iv)
Dissolution by notice of partnership at will
(Sec. 43)
2. Dissolution by the court’s order 2013, 2014
(i)
Dissolution by agreement (Sec. 40): A firm may be dissolved with the
consent of all the partners. A partnership is set up by an agreement; similarly,
it can be dissolved by an agreement. If there is any contract between the
partners about the mode of dissolution of the firm, it may be dissolved
accordingly.
(ii)
Compulsory Dissolution (Sec.41): A firm is dissolved compulsorily:
(a) If all the partners or a partner has been
adjudicated as insolvent, then the firm is dissolved as on the date of his
insolvency.
(b) If any event of the business of the firm
becomes unlawful, then the firm is dissolved.
(iii)
Dissolution on the Happening of Certain Contingencies (Sec. 42): Subject
to contract between the partners, a firm is dissolved on the happening of
certain contingencies:
a) On expiry
of the term for which the firm was constituted.
b) If firm is
constituted for a particular venture and that venture is completed.
c) On the
death of a partner; and
d) By the
adjudication of a partner as an insolvent.
(iv)
Dissolution by Notice of Partnership at Will (Sec. 43): 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.
(v)
Dissolution by Court (Sec. 44): A court may order a partnership firm
to be dissolved in the following cases:
a) When a
partner becomes of unsound mind.
b) When a
partner becomes permanently incapable of performing his/her duties as a
partner.
c) When
partner deliberately and consistently commits breach of partnership agreement.
d) When a
partner’s conduct is likely to adversely affect the business of the firm.
e) When a
partner transfers his/her interest in the firm to a third party;
f) When the
business of the firm cannot be carried on except at a loss in future also.
g) When the
court considers it just and equitable to dissolve the firm. The following are
the cases for the just and equitable grounds:
1. Deadlock in the management.
2. Where the partners are in talking
terms between them.
3. Loss of substratum.
4. Gambling by a partner on a stock
exchange.
Q.3. What is Realisation Account? Mention
its objectives. Distinguish between realisation account and revaluation
account. 2017, 2019
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Ans: Realisation account is prepared at the time of dissolution of
firm. It 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. It is prepared by:
a) Transferring all assets except cash or bank
account to the debit side of the account.
b) Transferring all liabilities except
partner’s capital, partner’s loan and reserves and surplus.
c) Amount realised on sale of assets is
credited to the realisation account.
d) Liabilities paid are debited to the
realisation account.
e) Expenses of dissolution are debited to
realisation account.
Balance in this account is either profit or
loss which is transferred to the capital accounts of all the partners in their
profit sharing ratio.
The main
objectives of preparing realisation account are: 2019
1) To close all the books of account at the
times of dissolution of the firm.
2) To record all the transactions relating
to the sale of assets and payment of liabilities.
3) To determine profit or loss due to the
realisation of assets and liabilities.
Difference
between Revaluation Account and Realisation Account: 2019
Basis |
Revaluation
Account |
Realisation
Account |
Meaning |
Revaluation account is prepared in order to
work out the profit or loss on revaluation of assets and liabilities. |
Realisation account is prepared to work out
the profit or loss on realisation of assets and payment to liabilities. |
Preparation |
Revaluation account is prepared at the time
of admission, retirement or death of a partner. |
Realisation account is prepared at the time
of dissolution of a partnership firm. |
Closing of accounts |
After preparing the revaluation account the
firm’s business gets going with the same set of books. |
After preparation of Realisation account,
all the accounts of the firm are closed. |
Remaining balance |
Balance of this account is transferred to
the capital account of old partners. |
Balance of this account is transferred to
the capital account of all partners. |
Accounting entries |
Entries are based on the difference between
the book value and the revalued amount of assets and liabilities. |
Entries are based on the book value of
assets and liabilities. |
Q.4. What are
unrecorded assets and unrecorded liabilities? Explain its treatment in
realisation account.
Ans: There may be some assets in the business which are not shown in balance sheet. These assets may have been debited in profit and loss account or may have been completely written off from the books of accounts but physically they still exist. Such assets are called unrecorded assets. Similarly, there may be some liabilities, which do not appear in the books but are payable. These liabilities are called unrecorded liabilities.
These assets and liabilities are not transferred to realisation account because they are not appearing in the books. These are treated while preparing realisation account in the following manner:
a) If unrecorded asset is realised, then it is debited to cash/bank account and credited to realisation account.
b) If unrecorded asset is taken over by any partner, it is debited to Partner’s Capital Account and credited to realisation account.
c) If unrecorded liability is paid, then it is debited to realisation account and credited to cash/bank account.
d) If unrecorded liability is paid by any partner, then it is debited to realisation account and credited to partner’s capital account.
Q.5. How are the accounts settled
between partners on the dissolution of a partnership firm? 2015
Ans: Settlement of Accounts: As soon as a firm is dissolved, the normal
business of the firm is discontinued and accounts of all the partners are
settled. Usually the partnership deed contains the clause for settlement of
partners account. But in the absence of any agreement between the partners, the
provisions of Sec. 48 of the Indian Partnership Act are followed. The accounts
of the partners are settled as follow:
1) When the firm
has suffered huge losses, the undistributed profits, if any, are first of all
to be applied to the payment of such losses. If the profits are insufficient,
the capital must be applied for payment of the losses and lastly, if necessary,
contributed by the partners individually in the proportion in which they share
profits.
2) When a partnership firm is dissolved, its
assets are disposed of and the proceeds there from including contribution by
the partners are utilised in the following manner:
(a) First, in
paying off the debts of the firm due to third parties;
(b) Then in
paying to each partner ratably any advances or loans given by him in addition
to or apart from his capital contribution;
(c) If any
surplus is available after discharging the above liabilities, the capital contributed
by the partners may be returned, if possible, in full or otherwise ratably;
(d) The
surplus, if any, shall be divided among the partners in their profit-sharing
ratios.
3) If the amount realised by sale of assets is not sufficient to discharge the claims of the creditors in full, the deficiency can be recovered proportionately from the personal properties of the partners. If any partner becomes insolvent, the remaining solvent partners will bear the loss in their capital ratio.