- State the meaning of dissolution of partnership firm
- Differentiate between dissolution of partnership and dissolution of a partnership firm
- Describe the various modes of dissolution of the partnership firm
- Explain the rules relating to the settlement of claims among all partners
- Prepare Realisation Account, Partners Capital Account, and Bank Account
Dissolution of Partnership Firm
Study Action Plan (Sorted by Difficulty)
Learning Objectives
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Revision Notes & Summary
TopNotes on Dissolution of Partnership Firm
Overview
- Dissolution of Partnership Firm: Refers to the discontinuance of partnership business and termination of economic relations between partners.
- Dissolution of Partnership: Occurs due to admission, retirement, or death of a partner without necessarily dissolving the firm.
Key Concepts
-
Dissolution of Partnership:
- Changes the relationship between partners but the firm may continue its business.
- Can occur through:
- Change in profit-sharing ratio.
- Admission of a new partner.
-
Dissolution of Firm:
- Involves the closure of business, realization of assets, and settlement of liabilities.
- All accounts are settled, and the firm's books are closed.
Modes of Dissolution
- Compulsory Dissolution: As per Section 39 of the Partnership Act 1932.
- Dissolution by Notice: When partners decide to dissolve the partnership.
Realisation Account
- Prepared to record transactions related to the sale and realization of assets and settlement of creditors.
- Any profit or loss from this process is shared among partners in their profit-sharing ratio.
Example Transactions
- Balance Sheet Example:
- Liabilities:
- Sundry Creditors: 62,000
- Bank Loan: 50,000
- Assets:
- Cash at Bank: 60,000
- Stock: 75,000
- Liabilities:
Important Definitions
- Realisation Expenses: Costs incurred during the dissolution process.
- Partners' Capital Accounts: Accounts that reflect the contributions and withdrawals of each partner.
Checklist for Understanding
- Differences between dissolution of partnership and dissolution of firm.
- Accounting treatment for unrecorded assets and liabilities during dissolution.
Common Questions
- What is the difference between dissolution of partnership and dissolution of partnership firm?
- How are unrecorded assets treated during dissolution?
- What happens to a partner's loan during dissolution?
Practice Test – MCQs, True/False
TopMultiple Choice Questions
A.
It is transferred to the Profit and Loss Account.
B.
It is divided among the partners in the capital ratio.
C.
It is transferred to the partners' capital accounts in their profit sharing ratio.
D.
It remains in the Realisation Account as a closing balance.
Correct Answer: C
Solution:
The balance of the Realisation Account, representing profit or loss, is transferred to the partners' capital accounts in their profit sharing ratio.
Chapter Concept:
Realisation Account
A.
Assets are revalued and liabilities are settled through a new balance sheet.
B.
Assets are sold and liabilities are paid off.
C.
Assets are transferred to the partners' personal accounts.
D.
Liabilities are transferred to a new firm.
Correct Answer: B
Solution:
During the dissolution of a firm, all assets are sold, and the liabilities are paid off as part of the winding-up process.
Chapter Concept:
Dissolution of Partnership Firm
A.
In dissolution of a partnership, the firm continues its business.
B.
In dissolution of a partnership firm, the business is terminated.
C.
Dissolution of a partnership always involves court intervention.
D.
Dissolution of a partnership firm does not require settlement of accounts.
Correct Answer: B
Solution:
In the dissolution of a partnership firm, the business is terminated, and the firm's assets are realized to settle liabilities.
Chapter Concept:
Dissolution of Partnership Firm
A.
Profit and Loss Account
B.
Capital Account
C.
Realisation Account
D.
Cash Flow Statement
Correct Answer: C
Solution:
A Realisation Account is prepared to ascertain the net effect (profit or loss) of realization of assets and payment of liabilities.
Chapter Concept:
Dissolution of Partnership Firm
A.
The deficiency is borne by the remaining solvent partners in their profit sharing ratio.
B.
The deficiency is borne by the remaining solvent partners in the ratio of their capitals.
C.
The deficiency is written off as a bad debt.
D.
The deficiency is added to the firm's liabilities.
Correct Answer: B
Solution:
According to the principle laid down in Garner vs. Murray, the solvent partners bear the loss in the ratio of their capitals as on the date of dissolution.
Chapter Concept:
Settlement of Accounts
A.
The asset is credited to the Realisation Account and debited to the Partner's Capital Account.
B.
The asset is debited to the Realisation Account and credited to the Partner's Capital Account.
C.
The asset is credited to the Partner's Capital Account and debited to the Bank Account.
D.
The asset is debited to the Partner's Capital Account and credited to the Realisation Account.
Correct Answer: A
Solution:
When a partner takes over an asset, the Realisation Account is credited and the Partner's Capital Account is debited with the agreed value of the asset.
Chapter Concept:
Realisation Account
A.
Dissolution by Agreement
B.
Compulsory Dissolution
C.
Dissolution by Notice
D.
Dissolution by Merger
Correct Answer: D
Solution:
Dissolution by Merger is not a recognized mode of dissolution of a partnership firm.
Chapter Concept:
Dissolution of Partnership Firm
A.
Capital Account
B.
Realisation Account
C.
Bank Account
D.
Current Account
Correct Answer: B
Solution:
The Realisation Account is prepared to record the transactions relating to the sale and realisation of assets and settlement of creditors during the dissolution.
Chapter Concept:
Journal Entries for Dissolution
A.
Losses are paid first out of capital, then profits, and lastly by partners individually.
B.
Losses are paid first out of profits, then capital, and lastly by partners individually.
C.
Losses are paid equally by all partners.
D.
Losses are written off as bad debts.
Correct Answer: B
Solution:
According to Section 48 of the Partnership Act 1932, losses are paid first out of profits, then out of capital, and lastly by the partners individually in their profit sharing ratio.
Chapter Concept:
Settlement of Accounts
A.
In paying the debts of the firm to the third parties.
B.
In paying each partner proportionately what is due to him/her from the firm for advances.
C.
In paying to each partner proportionately what is due to him on account of capital.
D.
The residue, if any, shall be divided among the partners in their profit sharing ratio.
Correct Answer: A
Solution:
According to Section 48 of the Partnership Act 1932, the assets are first applied in paying the debts of the firm to the third parties.
Chapter Concept:
Settlement of Accounts
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Dissolution of Partnership Firm
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Locked • AI Weakness TrackerTrue or False
Correct Answer: True
Solution:
The Realisation Account is specifically prepared during the dissolution of a firm to record transactions related to the sale of assets and payment of liabilities. The profit or loss from these transactions is shared among partners.
Chapter Concept :
Realisation Account
Correct Answer: False
Solution:
According to Section 48 of the Partnership Act 1932, losses are first paid out of profits, then out of the partners' capital, and lastly, if necessary, by the partners individually in their profit sharing ratio.
Chapter Concept :
Settlement of Accounts
Correct Answer: False
Solution:
In the dissolution of a firm, assets are sold and liabilities are paid-off, not revalued.
Chapter Concept :
Dissolution of Partnership Firm
Correct Answer: True
Solution:
When a firm is dissolved, it results in the dissolution of the partnership as the firm ceases to exist and all business activities are terminated.
Chapter Concept :
Legal Aspects of Dissolution
Correct Answer: True
Solution:
According to the rules provided in Section 48 of the Partnership Act 1932, losses, including deficiencies of capital, are paid first out of profits, next out of capital of partners, and lastly, if necessary, by the partners individually in their profit sharing ratio.
Chapter Concept :
Settlement of Accounts
Correct Answer: True
Solution:
A firm is compulsorily dissolved when all partners or all except one partner become insolvent, rendering them incompetent to sign a contract.
Chapter Concept :
Dissolution of Partnership Firm
Correct Answer: False
Solution:
In the Realisation Account, all assets except cash and bank balances are transferred to the account. Cash and bank balances are not transferred.
Chapter Concept :
Realisation Account
Correct Answer: False
Solution:
The partner's loan account is not transferred to the Realisation Account during the dissolution of a partnership firm. Instead, it is settled separately from the Realisation Account.
Chapter Concept :
Journal Entries for Dissolution
Correct Answer: True
Solution:
The dissolution of a firm involves closing the business, realizing all assets, paying liabilities, and settling accounts with partners, thereby terminating economic relations.
Chapter Concept :
Dissolution of Partnership Firm
Correct Answer: True
Solution:
The dissolution of a firm implies the discontinuance of partnership business and termination of economic relations between the partners, which necessarily involves dissolution of the partnership.
Chapter Concept :
Legal Aspects of Dissolution
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