Chapter 4: Dissolution of Partnership Firm

Dissolution of Partnership Firm

Short Answer Type Questions

Question 1

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

Basis Dissolution of Partnership Dissolution of Firm
Meaning It refers to the change in the existing relationship between partners. The firm continues its business. It refers to the closure of the business and end of the partnership relations among all partners.
Business Continuation The business of the firm is not terminated; it continues. The business of the firm comes to an end.
Books of Accounts Books of accounts are not closed; only revaluation is done. Books of accounts are closed completely.
Court Intervention Court does not intervene (Voluntary). Can be dissolved by court order or voluntarily.
Question 2

State the accounting treatment at the time of dissolution of a firm for: (i) Unrecorded Assets (ii) Unrecorded Liabilities.

(i) Unrecorded Assets:
If realized (sold) for cash:

Cash/Bank A/c … Dr.
    To Realisation A/c

If taken over by a partner:

Partner’s Capital A/c … Dr.
    To Realisation A/c

(ii) Unrecorded Liabilities:
If paid by the firm:

Realisation A/c … Dr.
    To Cash/Bank A/c

If assumed/paid by a partner:

Realisation A/c … Dr.
    To Partner’s Capital A/c
Question 3

On dissolution, how will you deal with partner’s loan if it appears on the (a) Assets side (b) Liabilities side of the Balance Sheet?

(a) If appearing on the Liabilities Side (Loan by Partner to Firm):

It is not transferred to the Realisation Account. It is paid directly through the Cash/Bank account after paying outside creditors but before paying partners’ capital.

Partner’s Loan A/c … Dr.
    To Bank A/c

(b) If appearing on the Assets Side (Loan by Firm to Partner):

It is transferred (debited) to the respective Partner’s Capital Account. It is adjusted against their capital balance.

Partner’s Capital A/c … Dr.
    To Partner’s Loan A/c
Question 4

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

Basis Firm’s Debts Private Debts
Meaning Debts owed by the firm to outsiders. Debts owed by a partner in his personal capacity.
Liability All partners are jointly and severally liable. Only the concerned partner is liable.
Application of Property Firm’s property is applied first to pay firm’s debts. Partner’s private property is applied first to pay private debts.
Question 5

State the order of settlement of accounts on dissolution.

According to Section 48 of the Indian Partnership Act, 1932, the amounts realized from assets shall be applied in the following order:

  • Third Party Debts: To pay secured and unsecured debts owed to outsiders (e.g., Creditors, Bank Loans).
  • Partner’s Loans: To pay loans/advances given by partners to the firm (distinct from capital).
  • Partners’ Capitals: To pay off the capital balances of partners.
  • Surplus (if any): If any amount remains, it is distributed among partners in their profit-sharing ratio.
Question 6

On what account Realisation Account differs from Revaluation Account?

Basis Realisation Account Revaluation Account
Time of Preparation Prepared at the time of Dissolution of the firm. Prepared at the time of Reconstitution (Admission, Retirement, Death).
Objective To find profit/loss on realization of assets and payment of liabilities upon closing the business. To adjust the value of assets and liabilities to current figures while continuing business.
Result Accounts are closed. Accounts remain open (revised values appear in new Balance Sheet).
Frequency Prepared only once during the lifetime of a firm. Can be prepared multiple times whenever reconstitution occurs.
Chapter 4: Long Answer Questions

Dissolution of Partnership Firm

Long Answer Type Questions

Question 1

Explain the process of dissolution of partnership firm.

The dissolution of a partnership firm is a legal process where the business of the firm is discontinued, and the economic relationship between all partners ends. The process generally involves the following steps:

  • Preparation of Realisation Account: All assets (except cash/bank) are transferred to the debit side, and all outside liabilities are transferred to the credit side of the Realisation Account to ascertain profit or loss on realization.
  • Disposal of Assets: The assets of the firm are sold off for cash or taken over by partners. The amount realized is credited to the Realisation Account.
  • Settlement of Liabilities: Outside liabilities (creditors, bills payable, bank loans) are paid off. If any liability remains unpaid, partners may have to pay from their private estate.
  • Settlement of Partners’ Loans: After outside debts, loans advanced by partners to the firm are paid off.
  • Return of Capital: After all external and internal debts are cleared, the remaining capital balance is returned to the partners.
  • Final Distribution: If any surplus remains, it is distributed among partners in their profit-sharing ratio. If there is a deficit, partners must bring in cash.
Question 2

What is a Realisation Account?

Definition: A Realisation Account is a nominal account prepared at the time of the dissolution of a partnership firm.

Purpose:

  • To close the books of accounts of the firm.
  • To record the realization (sale) of assets and settlement (payment) of liabilities.
  • To ascertain the profit or loss arising from the dissolution process.

Mechanism: Assets are transferred to the debit side at book value, and liabilities to the credit side. Amounts realized from assets are credited, and liabilities paid are debited. The balancing figure represents profit or loss on realisation, which is transferred to Partners’ Capital Accounts.

Question 3

Reproduce the format of Realisation Account.

Dr. Realisation Account Cr.
Particulars Amount (Rs.)
To Sundry Assets A/c (Individually)
(Transfer of assets at book value)		 XXX
To Bank/Cash A/c
(Payment of Liabilities)		 XXX
To Bank/Cash A/c
(Payment of Realisation Expenses)		 XXX
To Partner’s Capital A/c
(Liabilities taken over by partner)		 XXX
To Partner’s Capital A/c
(Profit on Realisation – Balancing Fig)		 XXX
Total XXXX
Particulars Amount (Rs.)
By Sundry Liabilities A/c
(Transfer of liabilities at book value)		 XXX
By Provision for Doubtful Debts XXX
By Bank/Cash A/c
(Amount realized from assets)		 XXX
By Partner’s Capital A/c
(Assets taken over by partner)		 XXX
By Partner’s Capital A/c
(Loss on Realisation – Balancing Fig)		 XXX
Total XXXX
Question 4

How is the deficiency of creditors paid off at the time of dissolution of the firm?

If the assets of the firm are insufficient to pay off the creditors (liabilities) in full, the deficiency is handled based on the principle of Unlimited Liability of partners:

  • Use of Private Estate: Partners are jointly and severally liable for the firm’s debts. They must bring in cash from their private estates (personal assets) to pay off the firm’s creditors.
  • Insolvency of Partners: If one or more partners are insolvent (cannot bring cash), the solvent partners may have to bear the deficiency according to the Garner vs. Murray rule (sharing the deficiency of capital in capital ratio) or simply bring in cash to pay firm debts if the firm itself is insolvent.
  • Ultimate Loss: If all partners are insolvent and their private estates are also insufficient, the amount available is distributed proportionately among the creditors. The unpaid balance (deficiency) becomes a Bad Debt for the creditors and is transferred to a Deficiency Account.
Chapter 4: Numerical Questions (1-5)

Dissolution of Partnership Firm

Numerical Questions (1-5)

Question 1
Journalise the following transactions regarding realisation expenses.
Particulars L.F. Dr. (Rs.) Cr. (Rs.)
[a] Realisation A/c … Dr.
To Bank/Cash A/c
(Expenses paid by firm) 		2,500
2,500
[b] Realisation A/c … Dr.
To Ashok’s Capital A/c
(Expenses paid by partner Ashok on behalf of firm) 		3,000
3,000
[c] No Entry
(Expenses borne and paid by partner personally) 		– –
[d] Realisation A/c … Dr.
To Amit’s Capital A/c
(Remuneration allowed to Amit for realisation) 		4,000
4,000
Note for (d): The actual expenses of Rs. 3,000 are not recorded because Amit was paid a fixed amount to handle realisation expenses. He bears the actual cost personally.
Question 2
Record necessary journal entries for settlement of Creditors.
Particulars Dr. (Rs.) Cr. (Rs.)
[a] Realisation A/c … Dr.
To Bank/Cash A/c
(Creditors settled: 40,000 paid in cash, balance by investment) 		40,000
40,000
[b] No Entry
(Creditors accepted machinery in full settlement) 		– –
[c] Bank/Cash A/c … Dr.
To Realisation A/c
(Cash received from creditors after settling claim with Building) 		30,000
30,000
Rule: No journal entry is passed for the transfer of assets to liabilities (creditors) in full or part settlement. Only the net cash paid or received is recorded.
Question 3
Unrecorded Asset (Old Computer) taken over by partner Nitin.
Particulars Dr. (Rs.) Cr. (Rs.)
Nitin’s Capital A/c … Dr.
To Realisation A/c
(Unrecorded asset taken over by partner Nitin) 		3,000
3,000
Question 4
Journal entries for various dissolution transactions.
Particulars Dr. (Rs.) Cr. (Rs.)
[a] Realisation A/c … Dr.
To Bank/Cash A/c
(Payment of unrecorded liability) 		3,200
3,200
[b] Rohit’s Capital A/c … Dr.
To Realisation A/c
(Stock taken over by partner Rohit) 		7,500
7,500
[c] Realisation A/c … Dr.
To Ashish’s Capital A/c (5/12)
To Tarun’s Capital A/c (7/12)
(Profit on Realisation distributed in 5:7 ratio) 		18,000
7,500
10,500
[d] Bank/Cash A/c … Dr.
To Realisation A/c
(Amount realised from unrecorded asset) 		5,500
5,500
Question 5
Give journal entries for the specific asset realisations.
Particulars Dr. (Rs.) Cr. (Rs.)
2. Aziz’s Capital A/c … Dr.
To Realisation A/c
(50% of 1,60,000 stock taken at 20% discount: 80k – 16k) 		64,000
64,000
3. Bank A/c … Dr.
To Realisation A/c
(Remaining 50% stock (80k) sold at 30% profit: 80k + 24k) 		1,04,000
1,04,000
4. Bank A/c … Dr.
To Realisation A/c
(Sold for 3,00,000 less 2% brokerage [6,000]) 		2,94,000
2,94,000
5. No Entry
(Plant handed over to creditor in settlement) 		– –
6. Bank A/c … Dr.
To Realisation A/c
(Investment realised at 50% of 4,000) 		2,000
2,000
Chapter 4: Numerical Questions (6-10)

Dissolution of Partnership Firm

Numerical Questions (6-10)

Question 6
Treatment of Realisation Expenses (Rashim and Bindiya).
Particulars Dr. (Rs.) Cr. (Rs.)
1. Realisation A/c … Dr.
To Bank/Cash A/c
(Expenses paid by the firm) 		1,00,000
1,00,000
2. Realisation A/c … Dr.
To Rashim’s Capital A/c
(Expenses paid by partner Rashim on behalf of firm) 		30,000
30,000
3. Realisation A/c … Dr.
To Rashim’s Capital A/c
(Remuneration allowed to Rashim; expenses borne by him personally) 		70,000
70,000
Question 7
Record journal entries for realisation of assets with complex adjustments.
Working Note: Asset Breakdown (Total 1,00,000)
  • Step A (Partner Takeover): 50% of Assets = 50,000 (Book Value). Taken by Atul at 20% Discount = 40,000.
  • Step B (Remaining Assets): 1,00,000 – 50,000 = 50,000 Balance.
  • Step C (Sale): 40% of Remaining (50,000) = 20,000 (Book Value). Sold at 30% Profit = 20,000 + 6,000 = 26,000.
  • Step D (Final Balance): Remaining 50,000 – 20,000 (Sold) = 30,000.
  • Step E (Disposal): 5% of 30,000 (1,500) realised nothing. The rest (28,500) given to creditor (No Entry).
Particulars Dr. (Rs.) Cr. (Rs.)
Atul’s Capital A/c … Dr.
To Realisation A/c
(50% assets taken over by Atul at 20% discount) 		40,000
40,000
Bank/Cash A/c … Dr.
To Realisation A/c
(40% of remaining assets sold at 30% profit) 		26,000
26,000
No Entry
(Remaining assets handed over to creditor in settlement) 		– –
Question 8
Entries for Unrecorded Assets and Liabilities (Paras and Priya).
Particulars Dr. (Rs.) Cr. (Rs.)
1. Bank A/c … Dr.
To Realisation A/c
(Unrecorded furniture sold) 		3,000
3,000
2. Bank A/c … Dr.
To Realisation A/c
(Bad debts recovered: 60% of 1,000) 		600
600
3. Paras’s Capital A/c … Dr.
To Realisation A/c
(Unrecorded Goodwill taken over by Paras) 		30,000
30,000
4. Priya’s Capital A/c … Dr.
To Realisation A/c
(Old typewriter taken over at 400 less 25%) 		300
300
5. Paras’s Capital A/c … Dr.
Priya’s Capital A/c … Dr.
To Realisation A/c
(100 shares @ Rs.6 taken by partners in Profit Ratio) 		300
300

600
Question 9
Conflict Resolution: Yastin’s Loan vs Capital Payment.

Decision: Yastin is correct.

Reasoning: According to Section 48 of the Indian Partnership Act, 1932, the order of settlement of accounts on dissolution is as follows:

  1. Payment of Third Party Debts (Outside Liabilities).
  2. Payment of Loans/Advances given by partners (distinct from capital).
  3. Payment of Partners’ Capital Accounts.

Therefore, Yastin’s loan of Rs. 2,00,000 must be paid off before any capital is returned to the partners (Amart).

Question 10
Journal entries for dissolution transactions (Arti and Karim).
Particulars Dr. (Rs.) Cr. (Rs.)
1. Arti’s Capital A/c … Dr.
To Realisation A/c
(Stock taken over by Arti) 		68,000
68,000
2. Karim’s Capital A/c … Dr.
To Realisation A/c
(Unrecorded bike taken over by Karim) 		40,000
40,000
3. Realisation A/c … Dr.
To Bank A/c
(Compensation paid to employees) 		40,000
40,000
4. Realisation A/c … Dr.
To Bank A/c
(Creditors settled at 15% discount: 36k – 5.4k) 		30,600
30,600
5. Arti’s Capital A/c … Dr. (3/7)
Karim’s Capital A/c … Dr. (4/7)
To Realisation A/c
(Loss on realisation distributed in 3:4 ratio) 		18,000
24,000

42,000
Chapter 4: Numerical Questions (11-15)

Dissolution of Partnership Firm

Numerical Questions (11-15)

Question 11
Rose and Lily (2:3). Dissolution. Realisation Exp 2,400. Motor Cycle sold 10k. Outstanding Bill 5k paid. B/R taken by Rose.
Correction Note: The P&L Account of 50,000 is on the Liability side, meaning it’s a Profit/Reserve. However, the question says “Profit and Loss” under liabilities usually means Accumulated Profit. If it’s accumulated profit, Rose gets +20k, Lily +30k.
Revised Capital Balances with P&L as Profit: Rose = 2,40,000 + 6,240 + 20,000 – 33,000 = 2,33,240. Lily = 1,60,000 + 9,360 + 30,000 = 1,99,360. (Matches Answer Key).
Question 12
Shilpa, Meena, Nanda (3:2:1). Dissolution. Stock 41,660 taken by Shilpa for 35k. Bank loan paid by Shilpa. Typewriter taken by creditor.
*Creditors: Total 37,000. Less Typewriter taken over (6,000) = 31,000 paid.
*Debtors: 10k realised 8k. Remaining 8,600 realised 50% = 4,300. Total = 12,300.
Question 13
Surjit and Rahi (3:2). Surjit takes Inv at 8k, pays Mrs. Loan. Creditors accept 37k.
Question 14
Rita, Geeta, Ashish (3:2:1). Rita to realise assets (5% comm, bears exp). Assets realised. Contingent liab paid.
Notes:
1. Assets Realised: Debtors(30k) + Stock(26k) + Plant(42,750) + Inv(85% of 69k = 58,650) = 1,57,400.
2. Liabilities Paid: Creditors(65k) + B/P(26k) + Salary(7.2k) + Bills Disc(9.8k) = 1,08,000.
3. Rita’s Comm: 5% of 1,57,400 = 7,870. (Rita bears expenses of 4,100, so firm pays nothing for exp).
Question 15
Anup and Sumit (Equal). Dissolution. Creditors paid 25,500.
*Assets Realised: Land(72k) + Furn(22.5k) + Stock(40.5k) + Plant(48k) + Debtors(10.5k) = 1,93,500.
Chapter 4: Numerical Questions (16-20)

Dissolution of Partnership Firm

Numerical Questions (16-20)

Question 16
Ashu and Harish (3:2). Ashu takes Building (95k), pays Creditors (88k). Harish takes Mach/Furn (80k), pays OD (50k). Stock/Inv taken in profit ratio.
*Note: Stock (20k) + Investments (60k) = 80k. Taken by partners in Profit Ratio (3:2). Ashu: 48,000. Harish: 32,000.
Question 17
Sanjay, Tarun, Vineet (3:2:1). Sanjay gets 6% Commission on Asset Sale, bears expenses.
Notes:
1. Assets Realised: Plant 72k + Debt 54k + Furn 18k + Stock (90% of 60k = 54k) + Inv 76k + BR 31k = 3,05,000.
2. Commission: 6% of 3,05,000 = 18,300.
3. Expenses: Realisation expenses (4,500) are borne by Sanjay, so no entry in Realisation A/c for payment.
Question 18
Gupta and Sharma. Investment taken by Gupta (36k), pays Mrs. Gupta’s Loan (20k). Creditors paid at 3% discount.
*Liabilities: Creditors(38k) + Mrs G Loan(20k) + Mrs S Loan(30k) + Prov DD(4k) = 92,000.
Question 19
Ashok, Babu, Chetan (3:2:1). Asset takeovers. Chetan’s Loan Adjustment.
*Chetan’s Loan Adjustment: Chetan owes the firm 24,600 on Capital A/c. This is adjusted against his Loan (30,000).
Net Amount paid to Chetan = 30,000 (Loan) – 24,600 (Cap Deficit) = 5,400.
Question 20
Tanu and Manu (5:3). Tanu pays Loan, takes Debtors & Car. Creditors take Stock & pay 10k. Manu takes Mach, pays BP.

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