Test: Dissolution Of Partnership - 1

Section 39 of the Indian Partnership Act, 1932 defines dissolution of partnership firm. It defines the dissolution of partnership between all the partners of a firm is called the dissolution of the firm.

When all partners of the firm become insolvent, in such a case it is compulsory to dissolve the firm. It means, this is the end of the partnership firm and end of the partnership among the partners.

Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved when a partner becomes insane.

Compulsory dissolution will take place when some event has taken place which makes it unlawful for the partnersto carry on the business of the firm in partnership, e.g., when a partner who is a citizen of a country becomes an alien enemy because of thedeclaration of war with his country and India.

Revaluation Account is not prepared at the time of dissolution of partnership firm. The main reason is that revaluation account is prepared at the time of change in existing partnership and not at the time of dissolution of partnership firm.

Partners may dissolved firm with mutual agreement without interference of the court. A court can dissolve a partnership firm in the following circumstances:
•When a partner has become of unsound mind
•When a partner is found guilty of breath of contract frequently 
•When business of the firm cannot be carried on except at a loss

The correct order of the payment should be:
(a) Expense incurred on realization of assets such as commission, cartage, brokerage etc.
(b) All outside creditors
(c) Partner’s Loan accounts 
(d) Balances in Capital Accounts of partners

At the time of dissolution, a partner may take asset, liability or unrecorded assets/liability at the agreed price but cannot take capital of any other partner.

The object of preparing Realisation account is to close the books of accounts of the dissolved firm and to determine profit or loss on the Realisation of assets and payment of liabilities.