Chapter 5:Dissolution of Partnership Firm NCERT SOLUTION CLASS 12TH ACCOUNTS | EDUGROWN NOTES

Short answer Type Question:

Q.1State the difference between dissolution of partnership and dissolution of partnership firm.

ANSWER:

Basis of Difference	Dissolution of Partnership	Dissolution of Partnership firm
Meaning	It means change in the partnership deed (or the agreement) among the partners.	It means that the business is wound up and the firm is dissolved.
Discontinuation	Business is not discontinued.	Business is discontinued, as the firm is dissolved.
Closure of Books of Accounts	Books of accounts are not closed, as there is only change in the existing agreement between the partners.	Books of accounts are closed, as the business is discontinued.
Assets and Liabilities	In this case, the assets and liabilities are revalued.	In this case, all the assets are sold off in order to pay the liabilities of the business.
Role of Court	There is no intervention by the court.	Dissolution of a partnership firm may be done with the consent of the court.
Nature	It is voluntary in nature.	It may be voluntary (as per the discretion of the partners) or compulsory (as per the order of the court).
Effect	It may or may not involve dissolution of the firm.	It necessarily involves dissolution of both the partnership as well as of the partnership firm.

Q.2 State the accounting treatment for:

i. Unrecorded assets

ii. Unrecorded liabilities

ANSWER:

i) Accounting Treatment for Unrecorded Assets

 Unrecorded asset is an asset, the value of which has been written off in the books of accounts but the asset is still in usable position. The accounting treatment for unrecorded asset is:

a) When the unrecorded asset is sold for cash

Cash A/c	Dr.
	To Realisation A/c
(Unrecorded assets sold for cash)

b) When the unrecorded asset is taken over by any partner

Partner’s Capital A/c	Dr.
	To Realisation A/c
(Unrecorded asset taken over by the partner)

ii) Accounting Treatment for Unrecorded Liabilities

 Unrecorded liabilities are those liabilities which are not recorded in the books of account. The accounting treatment for unrecorded liability is:

a) When the unrecorded liability is paid off

Realisation A/c	Dr.
	To Cash A/c
(Unrecorded liability paid in cash)

b) When the unrecorded liability is taken over by a partner

Realisation A/c	Dr.
	To Partner’s Capital A/c
(Unrecorded liability  taken over by the partner)

Q.3 On dissolution, how you deal with partner’s loan if it appears on the

(a) Assets side of the Balance Sheet

(b) Liabilities side of the Balance Sheet

ANSWER:

a) If partner’s loan appears on the assets side of the Balance Sheet then it implies that the partner has taken loan from the business and is liable to pay back to the business. In such case, the loan amount is transferred to his capital account. Thus the accounting entry will be:

Partner’s Capital A/c	Dr.
	To Partner’s Loan A/c
(Partner’s loan transferred to Partner’s Capital Account)

b) If partner’s loan appears on the liabilities side of the Balance Sheet then it implies that the partner has forwarded loan to the firm and the firm is liable to pay back the amount to the partner. In such case, partner’s loan is paid off after paying all the external liabilities. The partner’s loan is not transferred to the Realisation Account, in fact, it is paid in cash. The following accounting entry is passed.-

Partner’s Loan A/c	Dr.
	To Cash/Bank A/c
(Partner’s loan paid in cash)

Q.4 Distinguish between firm’s debts and partner’s private debts.

ANSWER:

Basis of Difference	Firm’s Debts	Partner’s Private Debts
Meaning	It refers to those debts that are borrowed against the name of the firm.	It refers to those debts that are borrowed personally by the partner.
Liability	All the partners of the firm are jointly and separately liable for the firm’s debt.	The concerned partner is personally liable for his private debts.
Settlement of debts by private assets	If the firm’s debt exceeds the firm’s assets, then private assets of the partners may be utilised to pay back the firm’s debt, if only  the partner’s  private assets exceeds his/her own private debts.	Private debts are settled against the partner’s private assets. Subsequently, if any surplus exists then this may be utilised to settle the firm’s debts.
Settlement of debts by firm’s assets	Firm’s debts are settled against the firm’s assets. Subsequently, if any surplus exists, then this is distributed among the partners.	After paying off firm’s debts, the surplus of firm’s assets, if any is distributed among the partners.  The personal share of the partner in this surplus can be utilised to settle his/her own private debts.

Q.5 State the order of settlement of accounts on dissolution.

ANSWER:

The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.

1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:

a) First of all the external liabilities and expenses are to be paid.

b) Then, all loans and advances forwarded by the partners should be paid.

c) Then, the capital of each partner should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital this should be paid in the following order:

a) First these should be adjusted against firm’s profits.

b) Then, against the total capital of the firm.

c)Even if  there exists any loss and deficiencies then it should be borne by all the partners individually in their profit sharing ratio.

Q.6 On what account realisation account differs from revaluation account.

ANSWER:

Basis of Difference	Realisation Account	Revaluation Account
Meaning	It records the sale of various assets and payment of various liabilities.	It records the effect of revaluation of assets and liabilities on the eve of admission, retirement, death and change in the profit sharing ratio.
Time	It is prepared at the time of dissolution of firm.	It is prepared when admission/retirement/death or change in profit sharing ratio takes place.
Objective	To find profit or loss on realisation of assets and payment of liabilities.	To find out profit or loss on revaluation of assets and liabilities.
Amount	Assets and liabilities are shown at the book value.	Increase or decrease in the value of assets and liabilities are shown in this account.
Records	All assets and liabilities are recorded here.	Only those assets and liabilities are recorded here whose values have changed over a period of time.
Effect	All accounts of assets and liabilities are closed.	No account is closed on revaluation of assets and liabilities.

LONG ANSWER TYPE QUESTIONS:

Q.1 Explain the process of dissolution of partnership firm.
ANSWER: Dissolution means breaking of relationship among the partners. As per Section 39 of the Indian Partnership Act 1932, the dissolution of firm implies that not only partnership is dissolved but the firm losses its existence, i.e., after dissolution the firm does not remain in business.
Dissolution of partnership firm implies discontinuation of the business of the partnership firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities and distribution of any surplus or borne of loss by the partners of the firm. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners.

(i) Dissolution by Agreement As a firm is formed with the consent of all partners with a mutual agreement. Dissolution can also be there with
the help of agreement. It happens in following two ways.
A firm may be dissolved
(a) When all the partners agree to dissolve the firm.
(b) When there is any term related to dissolution of firm in the partnership agreement.
(ii) Compulsory Dissolution A firm may be dissolved compulsorily in the following condition
(a) In case, all the partners or all except one partner become insolvent or insane.
(b) If the business becomes illegal.
(c) Where all the partners except one decide to retire from the firm.
(d) Where all the partners except one die.
(iii) Dissolution by Notice When partnership is at will then the partnership firm may be dissolved, if any partner give notice in writing to all the other partners expressing his/her intention to dissolve the firm.
(iv) Dissolution by Court A court may order for dissolution if a suit is filed by a partner, as per Section 44 of Indian Partnership Act, 1932. The court may order to dissolve a partnership in following conditions
(a) A partner becomes insane.
(b) A partner commits breach of agreement wilfully.
(c) When a partner’s conduct affects the business.
(d) When a partner transfers his interest to a third party.
(e) If business cannot be continued.
(f) If a partner becomes incapable of doing business.
(g) If court thinks dissolution to be just and equitable on any ground.
Besides these, above mentioned circumstances, a partnership firm may be dissolved if the court at any stage finds dissolution of the firm to be justified and inevitable.

Q.2 What is a Realisation Account?
ANSWER:  On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named realisation account. The main purpose to open realisation account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the partner’s capital account in their profit sharing ratio.
Concisely, following are the important objectives of preparing realisation account
(i) To close all the books of account.
(ii) To record transactions relating to the sale of assets and discharge of liabilities.
(iii) To determine profit or loss due to the realisation of assets and liabilities.
Features of Realisation Account
(i) In realisation account, sale of assets is recorded at their realised value.
(ii) Payment to liabilities (creditors) is recorded at their settlement value.
(iii) After all the transactions have been recorded, there will be balance, which may be profit or loss.
(iv) Profit arises in two situations
(a) When assets are realised at more than their book value.
(b) When liabilities are settled at less than their book value.
(v) If the two conditions are vice versa, the net result will be loss.
(vi) The net profit or loss on realisation is to be transferred to the partner’s capital accounts in their profit sharing ratio.

The format for realisation account is as follows

Q.3 Reproduce the format of Realisation Account.
ANSWER:

Q.4 How deficiency of creditors is paid off?
ANSWER: When a firm gets into the situation of dissolution, first of all the amount received from the sale of firm’s assets are utilised to pay the creditors. After that, if the sale receipts of assets fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of
creditors. This deficiency is handled in the following two ways
(i) In first case, deficiency is transferred to the Deficiency Account.
(ii) In second case, the deficiency is transferred to the partner’s capital account.
In first case, a separate account is prepared for the firm’s creditors. Then in ‘ order to ascertain the firm’s cash balance accruing from the sale of the firm’s
assets and partners’ private assets, cash account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.
In the second case, the creditors are paid by the cash available with the firm
including the partners’ individual contribution. The deficiency or unpaid creditors amount .is transferred to the partner’s capital account. Thus, the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm.
‘ If the partnership deed is silent, about such capital loss in the fact of insolvency of a partner, the deficiency on the insolvent partner’s capital ’ account must be borne by the other solvent partners, in proportion to their capital. In that case, we should apply Garner vs Murray decision in solving problems in partnership.