AHSEC - 12: Dissolution of Partnership Firms Important Notes for MAY' 2021 Exam | Revised and Reduced Syllabus

Class 12 Accountancy Notes

Unit – 4: Dissolution of Partnership Firms

Unit – 4: Dissolution of Partnership Firms FOR 2021 EXAM

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.

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ALSO READ (AHSEC ASSAM BOARD CLASS 12):

1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES

2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)

3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)

4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)

5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)

6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS

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Q.3. What is Realisation Account? Mention its objectives. Distinguish between realisation account and revaluation account.  2017, 2019

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.