Dissolution of Partnership Firms: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
 
 
 
 
 
  
PARTNERSHIP ACCOUNTS 
 
 
UNIT - 1: DISSOLUTION OF PARTNERSHIP FIRMS 
 
 
After studying this unit, you will be able to– 
? Go through the circumstances in which a partnership is 
dissolved. 
? Understand that on the dissolution of a partnership all assets 
are sold out and all liabilities are discharged. Learn the 
accounting technique relating to the disposal of assets and 
payment of liabilities. 
? Learn how to settle the partner's claims in case of surplus and 
how to raise money from partners in case of a deficit. 
? Deal with piecemeal distribution to partners of the amount 
realized from assets net of liabilities. 
  
CHAPTER 
2 
Page 2


LEARNING OUTCOMES 
 
 
 
 
 
  
PARTNERSHIP ACCOUNTS 
 
 
UNIT - 1: DISSOLUTION OF PARTNERSHIP FIRMS 
 
 
After studying this unit, you will be able to– 
? Go through the circumstances in which a partnership is 
dissolved. 
? Understand that on the dissolution of a partnership all assets 
are sold out and all liabilities are discharged. Learn the 
accounting technique relating to the disposal of assets and 
payment of liabilities. 
? Learn how to settle the partner's claims in case of surplus and 
how to raise money from partners in case of a deficit. 
? Deal with piecemeal distribution to partners of the amount 
realized from assets net of liabilities. 
  
CHAPTER 
2 
 
 
2.2 
 
ADVANCED ACCOUNTING 
 
Circumstances leading to Dissolution of Partnership 
 
 
Methods of piecemeal distribution 
 
  
where the firm is constituted 
for a fixed term, on the expiry 
of that term
where the firm is constituted to 
carry out one or more 
adventures or undertaking, 
then by completion thereof
by the death of a partner, and
by the adjudication of a partner 
as an insolvent.
Piecemeal distribution 
involves either of two 
methods 
Maximum loss method 
Highest relative capital 
method
 
Page 3


LEARNING OUTCOMES 
 
 
 
 
 
  
PARTNERSHIP ACCOUNTS 
 
 
UNIT - 1: DISSOLUTION OF PARTNERSHIP FIRMS 
 
 
After studying this unit, you will be able to– 
? Go through the circumstances in which a partnership is 
dissolved. 
? Understand that on the dissolution of a partnership all assets 
are sold out and all liabilities are discharged. Learn the 
accounting technique relating to the disposal of assets and 
payment of liabilities. 
? Learn how to settle the partner's claims in case of surplus and 
how to raise money from partners in case of a deficit. 
? Deal with piecemeal distribution to partners of the amount 
realized from assets net of liabilities. 
  
CHAPTER 
2 
 
 
2.2 
 
ADVANCED ACCOUNTING 
 
Circumstances leading to Dissolution of Partnership 
 
 
Methods of piecemeal distribution 
 
  
where the firm is constituted 
for a fixed term, on the expiry 
of that term
where the firm is constituted to 
carry out one or more 
adventures or undertaking, 
then by completion thereof
by the death of a partner, and
by the adjudication of a partner 
as an insolvent.
Piecemeal distribution 
involves either of two 
methods 
Maximum loss method 
Highest relative capital 
method
 
 
 
 
2.3 
 
PARTNERSHIP ACCOUNTS 
 
 1.1. INTRODUCTION  
Apart from the readjustment of rights of partners in the share of profit by way of 
change in the profit-sharing ratio and admission of a new partner or for 
retirement/death of a partner, another important aspect of partnership accounts is 
how to close books of accounts in case of dissolution. In this Unit, we will discuss the 
circumstances leading to the dissolution of a partnership firm and accounting 
treatment necessary to close its books of accounts. Also, we will discuss the special 
problems relating to the insolvency of partners and the settlement of the partnership's 
liabilities. 
 1.2 CIRCUMSTANCES LEADING TO DISSOLUTION 
OF PARTNERSHIP 
A partnership is dissolved or comes to an end on: 
 
However, the partners or remaining partners (in case of death or insolvency) may 
continue to do the business. In such a case there will be a new partnership but the firm 
will continue. When the business comes to an end then only it will be said that the firm 
has been dissolved. 
 
(a) the expiry of the term for which it was formed;
(b) completion of the venture for which it was entered into;
(c) death of a partner;
(d) insolvency of a partner.
Page 4


LEARNING OUTCOMES 
 
 
 
 
 
  
PARTNERSHIP ACCOUNTS 
 
 
UNIT - 1: DISSOLUTION OF PARTNERSHIP FIRMS 
 
 
After studying this unit, you will be able to– 
? Go through the circumstances in which a partnership is 
dissolved. 
? Understand that on the dissolution of a partnership all assets 
are sold out and all liabilities are discharged. Learn the 
accounting technique relating to the disposal of assets and 
payment of liabilities. 
? Learn how to settle the partner's claims in case of surplus and 
how to raise money from partners in case of a deficit. 
? Deal with piecemeal distribution to partners of the amount 
realized from assets net of liabilities. 
  
CHAPTER 
2 
 
 
2.2 
 
ADVANCED ACCOUNTING 
 
Circumstances leading to Dissolution of Partnership 
 
 
Methods of piecemeal distribution 
 
  
where the firm is constituted 
for a fixed term, on the expiry 
of that term
where the firm is constituted to 
carry out one or more 
adventures or undertaking, 
then by completion thereof
by the death of a partner, and
by the adjudication of a partner 
as an insolvent.
Piecemeal distribution 
involves either of two 
methods 
Maximum loss method 
Highest relative capital 
method
 
 
 
 
2.3 
 
PARTNERSHIP ACCOUNTS 
 
 1.1. INTRODUCTION  
Apart from the readjustment of rights of partners in the share of profit by way of 
change in the profit-sharing ratio and admission of a new partner or for 
retirement/death of a partner, another important aspect of partnership accounts is 
how to close books of accounts in case of dissolution. In this Unit, we will discuss the 
circumstances leading to the dissolution of a partnership firm and accounting 
treatment necessary to close its books of accounts. Also, we will discuss the special 
problems relating to the insolvency of partners and the settlement of the partnership's 
liabilities. 
 1.2 CIRCUMSTANCES LEADING TO DISSOLUTION 
OF PARTNERSHIP 
A partnership is dissolved or comes to an end on: 
 
However, the partners or remaining partners (in case of death or insolvency) may 
continue to do the business. In such a case there will be a new partnership but the firm 
will continue. When the business comes to an end then only it will be said that the firm 
has been dissolved. 
 
(a) the expiry of the term for which it was formed;
(b) completion of the venture for which it was entered into;
(c) death of a partner;
(d) insolvency of a partner.
 
 
2.4 
 
ADVANCED ACCOUNTING 
A firm stands dissolved in the following cases: 
 
 
 
 1.3 CONSEQUENCES OF DISSOLUTION 
On the dissolution of a partnership, firstly, the assets of the firm, including goodwill, 
are realized. Then the amount realized, is applied first towards repayment of liabilities 
to outsiders and loans taken from partners; afterwards, the capital contributed by 
partners is repaid and, if there is still a surplus, it is distributed among the partners in 
their profit-sharing ratio.  
Conversely, after payment of liabilities of the firm and repayment of loans from 
partners, if the assets of the firm leftover are insufficient to repay in full the capital 
contributed by each partner, the deficiency is borne by the partners in their profit-
sharing ratio.  
 
A firm stands dissolved in the following cases:
(i) The partners 
agree that the 
firm should be 
dissolved;
(i) The partners 
agree that the 
firm should be 
(ii) All partners 
except one 
become 
insolvent;
(iii) The 
business 
becomes 
illegal;
(iv) In case of 
partnership at 
will, a partner 
gives notice of 
dissolution; 
and
(v) The court 
orders 
dissolution.
The court has 
the option to 
order 
dissolution of a 
firm in the 
following 
circumstances :
(a) Where a partner has become of unsound mind;
(b) Where a partner suffers from permanent incapacity;
(c) Where a partner is guilty of misconduct of the business;
(d) Where a partner persistently disregards the partnership agreement;
(e) Where a partner transfers his interest or share to a third party;
(f) Where the business cannot be carried on except at a loss; and
(g) Where it appears to be just and equitable.
Page 5


LEARNING OUTCOMES 
 
 
 
 
 
  
PARTNERSHIP ACCOUNTS 
 
 
UNIT - 1: DISSOLUTION OF PARTNERSHIP FIRMS 
 
 
After studying this unit, you will be able to– 
? Go through the circumstances in which a partnership is 
dissolved. 
? Understand that on the dissolution of a partnership all assets 
are sold out and all liabilities are discharged. Learn the 
accounting technique relating to the disposal of assets and 
payment of liabilities. 
? Learn how to settle the partner's claims in case of surplus and 
how to raise money from partners in case of a deficit. 
? Deal with piecemeal distribution to partners of the amount 
realized from assets net of liabilities. 
  
CHAPTER 
2 
 
 
2.2 
 
ADVANCED ACCOUNTING 
 
Circumstances leading to Dissolution of Partnership 
 
 
Methods of piecemeal distribution 
 
  
where the firm is constituted 
for a fixed term, on the expiry 
of that term
where the firm is constituted to 
carry out one or more 
adventures or undertaking, 
then by completion thereof
by the death of a partner, and
by the adjudication of a partner 
as an insolvent.
Piecemeal distribution 
involves either of two 
methods 
Maximum loss method 
Highest relative capital 
method
 
 
 
 
2.3 
 
PARTNERSHIP ACCOUNTS 
 
 1.1. INTRODUCTION  
Apart from the readjustment of rights of partners in the share of profit by way of 
change in the profit-sharing ratio and admission of a new partner or for 
retirement/death of a partner, another important aspect of partnership accounts is 
how to close books of accounts in case of dissolution. In this Unit, we will discuss the 
circumstances leading to the dissolution of a partnership firm and accounting 
treatment necessary to close its books of accounts. Also, we will discuss the special 
problems relating to the insolvency of partners and the settlement of the partnership's 
liabilities. 
 1.2 CIRCUMSTANCES LEADING TO DISSOLUTION 
OF PARTNERSHIP 
A partnership is dissolved or comes to an end on: 
 
However, the partners or remaining partners (in case of death or insolvency) may 
continue to do the business. In such a case there will be a new partnership but the firm 
will continue. When the business comes to an end then only it will be said that the firm 
has been dissolved. 
 
(a) the expiry of the term for which it was formed;
(b) completion of the venture for which it was entered into;
(c) death of a partner;
(d) insolvency of a partner.
 
 
2.4 
 
ADVANCED ACCOUNTING 
A firm stands dissolved in the following cases: 
 
 
 
 1.3 CONSEQUENCES OF DISSOLUTION 
On the dissolution of a partnership, firstly, the assets of the firm, including goodwill, 
are realized. Then the amount realized, is applied first towards repayment of liabilities 
to outsiders and loans taken from partners; afterwards, the capital contributed by 
partners is repaid and, if there is still a surplus, it is distributed among the partners in 
their profit-sharing ratio.  
Conversely, after payment of liabilities of the firm and repayment of loans from 
partners, if the assets of the firm leftover are insufficient to repay in full the capital 
contributed by each partner, the deficiency is borne by the partners in their profit-
sharing ratio.  
 
A firm stands dissolved in the following cases:
(i) The partners 
agree that the 
firm should be 
dissolved;
(i) The partners 
agree that the 
firm should be 
(ii) All partners 
except one 
become 
insolvent;
(iii) The 
business 
becomes 
illegal;
(iv) In case of 
partnership at 
will, a partner 
gives notice of 
dissolution; 
and
(v) The court 
orders 
dissolution.
The court has 
the option to 
order 
dissolution of a 
firm in the 
following 
circumstances :
(a) Where a partner has become of unsound mind;
(b) Where a partner suffers from permanent incapacity;
(c) Where a partner is guilty of misconduct of the business;
(d) Where a partner persistently disregards the partnership agreement;
(e) Where a partner transfers his interest or share to a third party;
(f) Where the business cannot be carried on except at a loss; and
(g) Where it appears to be just and equitable.
 
 
 
2.5 
 
PARTNERSHIP ACCOUNTS 
 
According to the provisions contained in section 48 of the Partnership Act, upon 
dissolution of the partnership, the mutual rights of the partners, unless otherwise 
agreed upon, are settled in the following manner: 
(a) Losses including deficiencies of capital are paid, first out of profits, next out of 
capital, and, lastly, if necessary, by the partners individually in the proportion in 
which they are entitled to share profits. 
(b) The assets of the firm, including any sums contributed by the partners to make 
up deficiencies of capital have to be applied in the following manner and order: 
(i) in paying the debts of the firm to third parties; 
(ii) in paying to each partner rateably what is due to him from the firm in 
respect of advances as distinguished from capital; 
(iii) in paying to each partner what is due to him on account of capital; and 
(iv) the residue, if any, to be divided among the partners in the proportion in 
which they are entitled to share profits. 
Distinction between Dissolution of Partnership and Dissolution of Partnership 
Firm 
Dissolution of Partnership Dissolution of Partnership Firm 
Dissolution of a partnership refers to 
the discontinuance of the relation 
between the partners of the firm. 
Dissolution of the firm implies that the 
entire firm ceases to exist, including 
the relation among all the partners. 
There can be change in profit sharing 
ratio or admission/death/retirement of 
a partner. 
Dissolution of partnership firm occurs. 
In event of dissolution of the 
partnership, the business continues as 
usual, but the partnership is 
reconstituted. 
In event of the dissolution of the firm, 
the business ceases to end. 
There is no intervention by the court. Court has the inherent power to 
intervene. By its order, a firm can be 
dissolved. 
Economic relationships among 
partners may remain same or change. 
Economic relationship among partners 
comes to an end. 
Assets and liabilities are revalued. New 
balance sheet is prepared. 
Assets are sold and realized. Liabilities 
are paid off.