Dissolution of Partnership Firm

Dissolution of partnership firm means the partnership business is closed and all accounts are settled.

When a firm is dissolved, the business stops.

Assets are sold, liabilities are paid, and whatever remains is settled among partners.

Example: Riya and Amit run a stationery shop together. They decide to close the shop. They sell furniture and stock, pay creditors, and settle their capital accounts.

Simple line: Dissolution of firm means closing the partnership business.

Dissolution of partnership means the relationship between partners changes, but the business may continue.

Example: Amit retires, but Riya and Neha continue the business.

Dissolution of firm means the business itself is closed.

Example: all partners decide to close the shop.

Memory line: Dissolution of partnership changes partners. Dissolution of firm closes the business.

Partners may agree to close the business.

The business may be making continuous losses.

The main purpose of the business may be completed.

A partner may become unable to continue.

There may be serious disagreement among partners.

The business may become illegal.

A court may order dissolution.

Simple line: A firm is dissolved when the partnership business should not or cannot continue.

Riya and Amit run a small stationery shop.

After a few years, they decide to close the business because both want to start different careers.

The firm has cash, stock, furniture, debtors, creditors, a loan, and partner capital balances.

Now they must sell assets, collect money from debtors, pay creditors and loans, calculate profit or loss, share that profit or loss, and pay partners their final amounts.

This process is called dissolution.

Assets are transferred to Realisation Account.

Liabilities are transferred to Realisation Account.

Assets are sold.

Liabilities are paid.

Dissolution expenses are paid.

Realisation profit or loss is calculated.

Profit or loss is shared by partners in their profit sharing ratio.

Partner capital accounts are settled.

Bank or Cash Account is closed.

Simple line: Dissolution means converting everything into cash, paying dues, and settling partners.

Realisation Account is prepared during dissolution to find profit or loss from selling assets and paying liabilities.

When the firm closes, assets may not be sold at book value.

Liabilities may also be settled at different amounts.

Realisation Account records these changes.

Example: furniture book value is Rs.20,000 and it is sold for Rs.18,000. Loss is Rs.2,000.

Example: stock book value is Rs.30,000 and it is sold for Rs.35,000. Gain is Rs.5,000.

Simple line: Realisation Account finds profit or loss on closing the firm.

At dissolution, assets are sold or taken over.

If furniture is sold for Rs.15,000, Cash or Bank increases.

If Riya takes over furniture at Rs.12,000, Riya's Capital Account is debited.

If debtors Rs.20,000 are realised for Rs.18,000, Cash or Bank receives Rs.18,000.

Simple line: Assets are converted into cash or taken by partners.

At dissolution, liabilities must be paid or taken over.

If creditors Rs.10,000 are paid by bank, Bank decreases.

If Amit takes over loan Rs.20,000, Amit's Capital Account is credited.

If creditors Rs.10,000 are settled for Rs.9,000, the firm gains Rs.1,000.

Simple line: Liabilities are paid or taken over before partners receive their final amounts.

After selling assets and paying liabilities, Realisation Account shows profit or loss.

If the final result is profit, it is shared by partners in their profit sharing ratio.

If the final result is loss, it is also shared by partners in their profit sharing ratio.

Example: Realisation profit Rs.20,000 shared equally gives Riya Rs.10,000 and Amit Rs.10,000.

Example: Realisation loss Rs.12,000 shared in 2:1 gives Riya Rs.8,000 and Amit Rs.4,000.

Simple line: Realisation profit or loss is shared in profit sharing ratio.

Partner's Capital Accounts are used to settle final amounts payable to or receivable from partners.

The credit side may record opening capital balance, realisation profit share, partner taking over liability, and additional cash brought by partner.

The debit side may record drawings, realisation loss share, partner taking over asset, and final payment to partner.

Simple line: Partner's Capital Account shows final settlement with each partner.

Bank or Cash Account records actual money received and paid during dissolution.

Receipts include cash or bank balance, sale of assets, debtors realised, and cash brought by partner.

Payments include liabilities paid, dissolution expenses, and payment to partners.

At the end, Bank or Cash Account should close.

Simple line: Bank Account shows actual cash movement during dissolution.

Sometimes a partner may have a debit balance and may be unable to bring cash.

That means the firm expected money from the partner, but the partner cannot pay fully.

At a beginner level, remember that this creates an extra loss for the other partners according to the rule given in the question.

Simple line: If a partner cannot pay, the unpaid amount must still be settled fairly.