All questions of Unit 6: Dissolution of Partnership Firms and LLPs for CA Foundation Exam

Debiting the Cash Account for the money realised from the sale of unrecorded assets

When a business sells an unrecorded asset, it receives cash in exchange. This cash receipt needs to be recorded in the accounting system to ensure accurate financial reporting. The money realised from the sale of unrecorded assets is debited to the Cash Account because it represents an increase in the business's cash balance.

Importance of recording the sale of unrecorded assets

The sale of unrecorded assets can have an impact on the financial statements of a business. If the sale is not recorded, it can lead to incorrect financial reporting and misrepresent the financial position of the business. For example, if the business sells a valuable asset for a significant amount of cash, but fails to record the sale, its cash balance will be understated, and its assets will be overstated. This can lead to inaccurate financial ratios, such as the current ratio, and mislead stakeholders about the business's ability to meet its short-term obligations.

Conclusion

In conclusion, the money realised from the sale of unrecorded assets should be debited to the Cash Account to ensure accurate financial reporting and prevent misrepresentation of the business's financial position. It is important to record all transactions accurately and in a timely manner to maintain the integrity of the accounting system.

Particulars in Partnership Deed

A partnership deed is a legal document that outlines the terms and conditions of a partnership and the roles and responsibilities of each partner. It is a crucial document that helps to avoid misunderstandings and conflicts between partners in the future. The particulars that are usually included in a partnership deed are:

1. Name of the firm and partners:
The name of the partnership firm should be unique and should not be similar to any existing firm. The names of all partners along with their addresses and contact details should be mentioned in the deed.

2. Nature of business and duration of the firm:
The partnership deed should clearly state the nature of the business that the firm will engage in. It should also mention the duration for which the partnership will exist. The duration can be for a fixed period or until the completion of a particular project.

3. Capital contribution, profit/loss sharing ratio, and other agreed terms:
The partnership deed should specify the amount of capital that each partner will contribute to the business. It should also mention the profit/loss sharing ratio among the partners. Other terms that may be included are the salaries or drawings that partners are entitled to, the method of accounting to be used, and the procedures for admitting or expelling partners.

Conclusion:
In conclusion, a partnership deed is a crucial document that outlines the terms and conditions of a partnership. It should include the name of the firm and partners, the nature of business and duration of the firm, capital contribution, profit/loss sharing ratio, and other agreed terms. A well-drafted partnership deed can help to avoid misunderstandings and conflicts between partners and ensure the smooth running of the business.

Understanding Capital Profit Distribution in Partnerships
In a partnership, the dissolution of the firm leads to the realization of assets and liabilities, resulting in capital profits. The sharing of these profits is crucial for ensuring fair treatment among partners.
Default Sharing Ratio
- In the absence of a specific contractual agreement, capital profits are shared among partners based on their profit-sharing ratio.
- This ratio reflects the proportion in which the partners agreed to share the profits and losses of the business during its operation.
Why Profit-Sharing Ratio?
- The profit-sharing ratio is established at the inception of the partnership and embodies each partner's contribution and involvement in the business.
- It ensures that all partners receive a fair share of the profits based on their agreed-upon participation, rather than arbitrary or unequal distribution.
Implications of Capital Profit Sharing
- Sharing capital profits according to the profit-sharing ratio reinforces the principle of equity among partners, recognizing their respective contributions.
- It also minimizes disputes during dissolution, as partners have a clear understanding of how profits will be allocated.
Conclusion
In summary, when a partnership firm is dissolved, capital profits are distributed among partners in accordance with their profit-sharing ratio, unless a different agreement is in place. This practice promotes fairness and clarity in financial matters, ensuring that all partners are compensated according to their involvement in the partnership.

When a partner has given a loan to the firm, this loan is treated as a liability of the firm at the time of dissolution. The loan amount is settled by paying it through the Bank Account. Thus, Rohan's loan to the firm will be credited to the Bank Account when the loan is repaid.

At the time of dissolution of a partnership firm, all assets (except cash and bank) are transferred to the Realization Account at their Book Value. The Realization Account is a nominal account prepared to record the realization (sale) of assets and payment of liabilities. Assets are debited to the Realization Account at their book value, and the actual proceeds from the sale of these assets are credited. The resulting balance, which is the profit or loss on realization, is transferred to the Partners' Capital Accounts in their profit-sharing ratio.

Understanding Goodwill in Partnership Dissolution
When a partnership firm is dissolved, the treatment of goodwill is an important accounting consideration. Goodwill, which represents the intangible value of a business, must be properly accounted for during the dissolution process.
Why Option B is Correct
- Goodwill is recorded in the Realisation Account.
- This account is used to document the assets and liabilities of the partnership as they are settled during dissolution.
- By recording goodwill, partners acknowledge its value and ensure it is considered in the overall settlement of accounts.
Procedure of Recording Goodwill
1. Valuation of Goodwill:
- Before recording, goodwill must be accurately valued. This can be based on various methods, such as average profits or capitalisation of earnings.
2. Realisation Account:
- Goodwill is transferred to the Realisation Account alongside other assets.
- This account helps in determining the net assets to be distributed among partners.
3. Settlement Among Partners:
- After recording in the Realisation Account, the total amount will be distributed among the partners based on the agreed ratios.
- Typically, this follows their profit-sharing ratio unless otherwise agreed.
Conclusion
In summary, the correct treatment of goodwill during the dissolution of a partnership firm involves recording it in the Realisation Account. This ensures that all partners share in the value created by the partnership equitably, reflecting goodwill's significance in the overall financial picture of the firm.

Realisation Account vs Revaluation Account
Realisation Account and Revaluation Account are both important accounts used in accounting, but they serve different purposes and are prepared at different times during the life of a firm. Let's understand the key differences between the two:

Realisation Account
- Realisation Account is prepared only once during the life of a firm.
- It is used to record the sale of assets and liabilities when a firm is being dissolved or when there is a change in the constitution of the firm.
- The main purpose of the Realisation Account is to determine the profit or loss on the realisation of assets and settlement of liabilities.
- It helps in distributing the final profits or losses among the partners of the firm.

Revaluation Account
- Revaluation Account is prepared at different times during the life of a firm, typically when there is a change in the partnership or when the firm wants to revalue its assets and liabilities.
- It is used to record any increase or decrease in the value of assets and liabilities of the firm.
- The main purpose of the Revaluation Account is to adjust the capital accounts of the partners based on the revalued amounts of assets and liabilities.
- It helps in maintaining the accuracy of the capital accounts and reflecting the true financial position of the firm.
In conclusion, while Realisation Account is prepared only once during the life of a firm to determine the final profit or loss, Revaluation Account is prepared at different times to adjust the values of assets and liabilities and to maintain the accuracy of the capital accounts.

→ At the time of dissolution of a partnership firm, capital profit (surplus) is shared among partners according to their profit-sharing ratio unless specified otherwise in a contract.
→ As per Section 48 of the Indian Partnership Act, 1932:
Losses, including capital deficiencies, are settled first out of profits, then capital, and lastly by partners in their profit-sharing ratio.
Surplus or capital profit (if any) remaining after paying all liabilities, advances, and capital contributions is divided among partners in their profit-sharing ratio.
Identify which account is prepared at last in the process of firm’s dissolution:
Option A: Realization Account
Option B: Partner’s Capital Accounts
Option C: Cash Account
Option D: More than one of the above
Answer: Option C: Cash Account

At the time of dissolution, if a partner takes over an unrecorded asset, the Realization Account is credited with the value of the asset. The Realization Account is a nominal account used to close the firm's books, record the sale of assets, payment of liabilities, and transfer of unrecorded assets. The partner’s capital account is then adjusted accordingly.

At the time of dissolution of a partnership firm, the assets are applied in the following order:
- In paying the debts of the firm to third parties (C).
- In paying each partner rateably for their advances as distinguished from capital (A).
- In paying each partner rateably what is due to them on account of capital (B).
- The remaining surplus, if any, is divided among the partners in their profit-sharing ratio (D).

After the dissolution of a partnership firm, the rights of the partners are mainly related to the settlement of the firm's affairs, repayment of debts, and distribution of any surplus assets. Partners also have the right to restrain other partners from misusing the firm’s name or property and the right to receive the return of the premium if the dissolution is premature.
However, the right to be consulted ceases to exist after the dissolution because the partnership no longer operates as a business entity. The main focus shifts to the settlement of accounts and winding up the firm’s affairs. Therefore, the right to be consulted is not available to a partner after the dissolution of the firm.

Section 41 of the Indian Partnership Act, 1932, deals with compulsory dissolution of a partnership firm. A firm is dissolved compulsorily in the following circumstances:
- When all the partners, or all but one, become insolvent, making them incapable of signing a contract.
- When the firm's business becomes illegal due to changes in law.
- When an event occurs that makes it illegal for partners to continue the business, such as one partner becoming an alien enemy due to war with their country.
This dissolution under Section 41 is termed compulsory dissolution as it arises due to legal or unavoidable conditions.