The compilation of these Dissolution of Partnership Firm Notes makes students exam preparation simpler and organised.
Accounting Treatment of Dissolution
Let us learn about the accounting treatment in case of a dissolution of the partnership firm. There is a special account to be made known as the realisation account, along with the necessary changes to the capital accounts. Let us study this.
On dissolution, the books of the firm are to be closed. The dissolution process starts by opening the following accounts in the firm’s books:
- Realisation Account
- Partner’s Loan Account
- Partners’ Capital Accounts
- Bank or Cash Account
1. Realisation Account
The object of preparing Realisation account is to close the books of accounts of the dissolved firm and to determine profit or loss on the Realisation of assets and payment of liabilities. It is prepared by:
- Transferring all the assets except Cash or Bank Account to the debit side of the account.
- Transferring all the liabilities except Partner’s Loan Account and Partners’ Capital Accounts to the credit side of the account.
- Crediting the Receipt on the sale of assets to the account.
- Debiting the payment of Liabilities to the account.
- Debiting the dissolution expenses of the firm.
The balance in the account may be either profit or loss. We transfer this balance to the Capital Accounts of the Partners in their profit-sharing ratio.
2. Partner’s Loan Account
We do not transfer the loan by a partner to the firm to the Realisation account, it remains in its account itself. At the time of settlement, i.e., payment of liabilities, we pay the partner’s loan after paying the outside liabilities but before payment of capital.
Following entry is the entry on payment of Partner’s loan:
3. Partners Capital Accounts
If partners take over the firm’s assets, we debit it to their Capital Accounts at the agreed value being payment against their capital. If a partner takes over the liability of the firm, we credit it to their Capital Accounts. In addition, we also transfer undistributed profits/losses, reserves, and Realisation profit/loss to capital accounts in their profit-sharing ratio. Entries are:
i. On transfer of undistributed profits/losses and reserves:
ii. Transfer of Realisation profit/ loss
iii. For final settlement with partners:
a. The partner brings Cash to meet the deficiency in capital
b. On payment to partners or closing partners’ capital accounts
4. Bank or Cash Account
On the debit side, we show the opening balance, the amount received from the sale of assets, and the amount brought by partners. And on the credit side, we show payment of liabilities, expenses, and amounts paid to partners. After settling the claims of the partners, there is no balance in the Bank/Cash Account.
P and Q were sharing profits and losses in the ratio of 3: 2. The balance sheet of a firm as of 31st March 2018 is:
On the above date, the firm dissolves. Following is the additional information. Prepare the necessary Accounts.
- P took over 50% of the furniture at 20% less than book value. The remaining furniture was sold for ₹ 1,05,000.
- Debtors realised at ₹ 26,000.
- Q took over the stock for ₹ 29,000.
- Q’s sister’s loan was paid off along with an interest of ₹ 2,000.
- Expenses on realisation amounted to ₹ 5,000.
Partner’s Capital Accounts