- 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.
The economic relationship continues in a changed form.
B.
The economic relationship between the partners comes to an end.
C.
The economic relationship is transferred to a new firm.
D.
The economic relationship is unaffected.
Correct Answer: B
Solution:
Upon the dissolution of a partnership firm, the economic relationship between the partners comes to an end as the firm ceases to exist.
Chapter Concept:
Settlement of Accounts
A.
It is borne by the solvent partners in their profit sharing ratio
B.
It is borne by the solvent partners in the ratio of their capitals
C.
It is borne equally by all partners
D.
It is not accounted for
Correct Answer: B
Solution:
According to the Garner vs. Murray rule, the loss is borne by the solvent partners in the ratio of their capitals.
Chapter Concept:
Settlement of Accounts
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.
It is transferred to the Realisation Account.
B.
It is settled directly through the Bank Account.
C.
It is ignored during dissolution.
D.
It is transferred to the Partner's Capital Account.
Correct Answer: B
Solution:
A partner's loan appearing on the liabilities side is settled directly through the Bank Account and not transferred to the Realisation Account.
Chapter Concept:
Realisation Account
A.
It is debited.
B.
It is credited.
C.
It remains unchanged.
D.
It depends on the type of liability.
Correct Answer: B
Solution:
If a partner assumes responsibility for a liability, the partner's capital account is credited.
Chapter Concept:
Journal Entries for Dissolution
A.
Assets taken over by partners
B.
Accumulated profits
C.
Partners' capital accounts
D.
Bank overdraft
Correct Answer: A
Solution:
Assets taken over by partners are recorded in the Realisation Account as they are part of the asset realization process during dissolution.
Chapter Concept:
Realisation Account
A.
To record the revaluation of assets and liabilities.
B.
To ascertain the profit or loss on realization of assets and settlement of liabilities.
C.
To distribute the remaining cash among partners.
D.
To prepare a new balance sheet for the reconstituted firm.
Correct Answer: B
Solution:
The Realisation Account is prepared to record the transactions related to the sale and realization of assets and settlement of liabilities, and to ascertain the resulting profit or loss.
Chapter Concept:
Realisation Account
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.
They are ignored as they are not part of the balance sheet.
B.
They are recorded at their market value in the Realisation Account.
C.
They are transferred to the Partner's Capital Account directly.
D.
They are recorded at book value in the Realisation Account.
Correct Answer: B
Solution:
Unrecorded assets are recorded at their market value in the Realisation Account during dissolution.
Chapter Concept:
Realisation Account
A.
The partner's capital account is debited.
B.
The partner's capital account is credited.
C.
The Realisation Account is debited.
D.
The Realisation Account is credited.
Correct Answer: A
Solution:
When a partner takes responsibility for paying off a loan, the partner's capital account is debited to reflect the assumption of the liability.
Chapter Concept:
Realisation Account
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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: True
Solution:
During the dissolution of a partnership firm, all assets except cash and bank balances are indeed transferred to the Realisation Account to facilitate the settlement of liabilities and distribution of any remaining balance among partners.
Chapter Concept :
Journal Entries for Dissolution
Correct Answer: False
Solution:
The Realisation Account is not used for ongoing operations but is prepared during the dissolution of a firm to ascertain the net effect of realisation of assets and payment of liabilities.
Chapter Concept :
Realisation Account
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: False
Solution:
Dissolution of a partnership does not necessarily involve the dissolution of the firm. The firm may continue its business as before.
Chapter Concept :
Dissolution of Partnership Firm
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:
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:
The private property of a partner is first used to pay private debts, and any surplus may be used for the firm's debts if the firm's liabilities exceed its assets.
Chapter Concept :
Settlement of Accounts
Correct Answer: True
Solution:
During the dissolution of a firm, all assets and liabilities are transferred to the Realisation Account to determine the profit or loss on realization.
Chapter Concept :
Dissolution of Partnership Firm
Correct Answer: False
Solution:
Losses during the dissolution of a partnership firm are covered first out of profits, then out of the capital of partners, and finally, if necessary, by the partners individually in their profit sharing ratio.
Chapter Concept :
Journal Entries for Dissolution
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