NCERT Textbook - Dissolution of a Partnership Firm Commerce Notes | EduRev

Accountancy Class 12

Created by: Nipun Tuteja

Commerce : NCERT Textbook - Dissolution of a Partnership Firm Commerce Notes | EduRev

 Page 1


Y
ou have learnt about the reconstitution of a
partnership firm which takes place on account
of admission, retirement or death of a partner . In such
a situation while the existing partnership is dissolved,
the firm may continue under the same name if the
partners so decide. In other words, it results in the
dissolution of a partnership but not that of the firm.
According to Section 39 of the partnership Act 1932,
the dissolution of partnership between all the partners
of a firm is called the dissolution of the firm. That
means the Act recognises the difference in the
breaking of relationship between all the partners of a
firm and between some of the partners; and it is the
breaking or discontinuance of relationship between
all the partners which is termed as the dissolution of
partnership firm. This brings an end to the existence
of firm, and no business is transacted after
dissolution except the activities related to closing of
the firm as the affairs of the firm are to be wound up
by selling firm’s assets and paying its liabilities and
discharging the claims of the partners.
5.1  Dissolution of Partnership
As stated earlier dissolution of partnership changes
the existing relationship between partners but the
firm may continue its business as before. The
dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit sharing ratio among
partners;
(2) Admission of a new partner;
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
? State the meaning of
dissolution of
partnership firm;
? Differentiate between
dissolution of partner-
ship 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;
? Record journal entries
and prepare the
necessary ledger
accounts to close the
books of the firm and
settlement of partners’
claim.
Dissolution of Partnership Firm
5
Page 2


Y
ou have learnt about the reconstitution of a
partnership firm which takes place on account
of admission, retirement or death of a partner . In such
a situation while the existing partnership is dissolved,
the firm may continue under the same name if the
partners so decide. In other words, it results in the
dissolution of a partnership but not that of the firm.
According to Section 39 of the partnership Act 1932,
the dissolution of partnership between all the partners
of a firm is called the dissolution of the firm. That
means the Act recognises the difference in the
breaking of relationship between all the partners of a
firm and between some of the partners; and it is the
breaking or discontinuance of relationship between
all the partners which is termed as the dissolution of
partnership firm. This brings an end to the existence
of firm, and no business is transacted after
dissolution except the activities related to closing of
the firm as the affairs of the firm are to be wound up
by selling firm’s assets and paying its liabilities and
discharging the claims of the partners.
5.1  Dissolution of Partnership
As stated earlier dissolution of partnership changes
the existing relationship between partners but the
firm may continue its business as before. The
dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit sharing ratio among
partners;
(2) Admission of a new partner;
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
? State the meaning of
dissolution of
partnership firm;
? Differentiate between
dissolution of partner-
ship 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;
? Record journal entries
and prepare the
necessary ledger
accounts to close the
books of the firm and
settlement of partners’
claim.
Dissolution of Partnership Firm
5
227 Dissolution of Partnership Firm
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) Expiry of the period of partnership, if partnership is for a specific period
of time;
5.2  Dissolution of a firm
Dissolution of a partnership firm may take place without the intervention of
court or by the order of a court, in any of the ways specified later in this section.
It may be noted that dissolution of the firm necessarily brings in dissolution of
the partnership.
Dissolution of a firm takes place in any of the following ways:
1. Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.
2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner , become insolvent, rendering
them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners
to 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 the
declaration of war with his country and India.
3. On the happening of certain contingencies: Subject to contract between the
partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved
if any one of the partners gives a notice in writing to the other partners,
signifying his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a
partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties
as a partner;
(c) when a partner is guilty of misconduct which is likely to adversely affect
the business of the firm;
Page 3


Y
ou have learnt about the reconstitution of a
partnership firm which takes place on account
of admission, retirement or death of a partner . In such
a situation while the existing partnership is dissolved,
the firm may continue under the same name if the
partners so decide. In other words, it results in the
dissolution of a partnership but not that of the firm.
According to Section 39 of the partnership Act 1932,
the dissolution of partnership between all the partners
of a firm is called the dissolution of the firm. That
means the Act recognises the difference in the
breaking of relationship between all the partners of a
firm and between some of the partners; and it is the
breaking or discontinuance of relationship between
all the partners which is termed as the dissolution of
partnership firm. This brings an end to the existence
of firm, and no business is transacted after
dissolution except the activities related to closing of
the firm as the affairs of the firm are to be wound up
by selling firm’s assets and paying its liabilities and
discharging the claims of the partners.
5.1  Dissolution of Partnership
As stated earlier dissolution of partnership changes
the existing relationship between partners but the
firm may continue its business as before. The
dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit sharing ratio among
partners;
(2) Admission of a new partner;
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
? State the meaning of
dissolution of
partnership firm;
? Differentiate between
dissolution of partner-
ship 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;
? Record journal entries
and prepare the
necessary ledger
accounts to close the
books of the firm and
settlement of partners’
claim.
Dissolution of Partnership Firm
5
227 Dissolution of Partnership Firm
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) Expiry of the period of partnership, if partnership is for a specific period
of time;
5.2  Dissolution of a firm
Dissolution of a partnership firm may take place without the intervention of
court or by the order of a court, in any of the ways specified later in this section.
It may be noted that dissolution of the firm necessarily brings in dissolution of
the partnership.
Dissolution of a firm takes place in any of the following ways:
1. Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.
2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner , become insolvent, rendering
them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners
to 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 the
declaration of war with his country and India.
3. On the happening of certain contingencies: Subject to contract between the
partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved
if any one of the partners gives a notice in writing to the other partners,
signifying his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a
partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties
as a partner;
(c) when a partner is guilty of misconduct which is likely to adversely affect
the business of the firm;
228 Accountancy – Not-for-Profit Organisation and Partnership Accounts
(d) when a partner persistently commits breach of partnership agreement;
(e) when a partner has transferred the whole of his interest in the firm to a
third party;
(f) when the business of the firm cannot be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and
equitable.
Distinction between Dissolution of Partnership and Dissolution of Firm
Basis Dissolution of Partnership Dissolution of Firm
1. Termination of The business is not The business of the firm is
business terminated. closed.
2. Settlement of Assets and liabilities are Assets are sold and
assets and revalued and new balance liabilities are paid-off.
liabilities sheet is drawn.
3. Court’s Court does not intervene A firm can be dissolved by
intervention because partnership is the court’s order.
dissolved by mutual
agreement.
4. Economic Economic relationship Economic relationship
relationship between the partners between the partners
continues though in comes to an end.
a changed form.
5. Closure of books Does not require because The books of account are
the business is not closed.
terminated.
6. Other dissolution It may or may not involve It necessarily involves
dissolution of the firm. dissolution of partnership.
Test your Understanding – I
State giving reasons, which of the following statements are true or false:
1. Dissolution of a partnership is different from dissolution of a firm,
2. A partnership is dissolved when there is a death of a partner,
3. A firm is dissolved when all partners give consent to it.
4. A firm is compulsorily dissolved when a partner decide to retire.
5. Dissolution of a firm necessarily involves dissolution of partnership.
6. A firm is compulsorily dissolved when all partners or when all except one partner
become involvent.
7. Court can order a firm to be dissolved when a partner becomes insane.
8. Dissolution of partnership can not take place without intervention of
the court.
Page 4


Y
ou have learnt about the reconstitution of a
partnership firm which takes place on account
of admission, retirement or death of a partner . In such
a situation while the existing partnership is dissolved,
the firm may continue under the same name if the
partners so decide. In other words, it results in the
dissolution of a partnership but not that of the firm.
According to Section 39 of the partnership Act 1932,
the dissolution of partnership between all the partners
of a firm is called the dissolution of the firm. That
means the Act recognises the difference in the
breaking of relationship between all the partners of a
firm and between some of the partners; and it is the
breaking or discontinuance of relationship between
all the partners which is termed as the dissolution of
partnership firm. This brings an end to the existence
of firm, and no business is transacted after
dissolution except the activities related to closing of
the firm as the affairs of the firm are to be wound up
by selling firm’s assets and paying its liabilities and
discharging the claims of the partners.
5.1  Dissolution of Partnership
As stated earlier dissolution of partnership changes
the existing relationship between partners but the
firm may continue its business as before. The
dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit sharing ratio among
partners;
(2) Admission of a new partner;
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
? State the meaning of
dissolution of
partnership firm;
? Differentiate between
dissolution of partner-
ship 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;
? Record journal entries
and prepare the
necessary ledger
accounts to close the
books of the firm and
settlement of partners’
claim.
Dissolution of Partnership Firm
5
227 Dissolution of Partnership Firm
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) Expiry of the period of partnership, if partnership is for a specific period
of time;
5.2  Dissolution of a firm
Dissolution of a partnership firm may take place without the intervention of
court or by the order of a court, in any of the ways specified later in this section.
It may be noted that dissolution of the firm necessarily brings in dissolution of
the partnership.
Dissolution of a firm takes place in any of the following ways:
1. Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.
2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner , become insolvent, rendering
them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners
to 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 the
declaration of war with his country and India.
3. On the happening of certain contingencies: Subject to contract between the
partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved
if any one of the partners gives a notice in writing to the other partners,
signifying his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a
partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties
as a partner;
(c) when a partner is guilty of misconduct which is likely to adversely affect
the business of the firm;
228 Accountancy – Not-for-Profit Organisation and Partnership Accounts
(d) when a partner persistently commits breach of partnership agreement;
(e) when a partner has transferred the whole of his interest in the firm to a
third party;
(f) when the business of the firm cannot be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and
equitable.
Distinction between Dissolution of Partnership and Dissolution of Firm
Basis Dissolution of Partnership Dissolution of Firm
1. Termination of The business is not The business of the firm is
business terminated. closed.
2. Settlement of Assets and liabilities are Assets are sold and
assets and revalued and new balance liabilities are paid-off.
liabilities sheet is drawn.
3. Court’s Court does not intervene A firm can be dissolved by
intervention because partnership is the court’s order.
dissolved by mutual
agreement.
4. Economic Economic relationship Economic relationship
relationship between the partners between the partners
continues though in comes to an end.
a changed form.
5. Closure of books Does not require because The books of account are
the business is not closed.
terminated.
6. Other dissolution It may or may not involve It necessarily involves
dissolution of the firm. dissolution of partnership.
Test your Understanding – I
State giving reasons, which of the following statements are true or false:
1. Dissolution of a partnership is different from dissolution of a firm,
2. A partnership is dissolved when there is a death of a partner,
3. A firm is dissolved when all partners give consent to it.
4. A firm is compulsorily dissolved when a partner decide to retire.
5. Dissolution of a firm necessarily involves dissolution of partnership.
6. A firm is compulsorily dissolved when all partners or when all except one partner
become involvent.
7. Court can order a firm to be dissolved when a partner becomes insane.
8. Dissolution of partnership can not take place without intervention of
the court.
229 Dissolution of Partnership Firm
5.3 Settlement of Accounts
In case of dissolution of a firm, the firm ceases to conduct business and has to
settle its accounts. For this purpose, it disposes off all its assets for satisfying all
the claims against it. In this context it should be noted that, subject to agreement
among the partners, the following rules as provided in Section 48 of the
Partnership Act 1932 shall apply.
(a) Treatment of Losses
Losses, including deficiencies of capital, shall be paid :
(i) first out of profits,
(ii) next out of capital of partners, and
(iii) lastly, if necessary, by the partners individually in their profits sharing ratio.
(b) Application of Assets
The assets of the firm, including any sum contributed by the partners to make
up deficiencies of capital, shall be applied in the following manner and order:
(i) In paying the debts of the firm to the third parties;
(ii) In paying each partner proportionately what is due to him/her from the
firm for advances as distinguished from capital (i.e. partner’ loan);
(iii) In paying to each partner proportionately what is due to him on account
of capital; and
(iv) the residue, if any, shall be divided among the partners in their profit
sharing ratio.
Thus, the amount realised from assets along with contribution from partners, if
required, shall be utilised first to pay off the outside liabilities of the firm such as
creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured
loans have precedence over the unsecured loans); the balance should be applied
to repay loans and advances made by the partners to the firm. (in case the
balance amount is not adequate enough to pay off such loans and advances,
they are to be paid propartionately); and surplus, if any is to be utilised in
settlement of the capital account balances, after adjusting all profits and losses.
Private Debts and Firm’s Debts: Where both the debts of the firm and private debts of
a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.
(a) The property of the firm shall be applied first in the payment of debts of the
firm and then the surplus, if any, shall be divided among the partners as
per their claims, which can be utilised for payment of their private liabilities.
(b) The private property of any partner shall be applied first in payment of
his private debts and the surplus, if any, may be utilised for payment of
the firm’s debts, in case the firm’s liabilities exceed the firm’s assets.
It may be noted that the private property of the partner does not include the
personal properties of his wife and children. Thus, if the assets of the firm are
not adequate enough to pay off firm’s liabilities, the partners have to contribute
out of their net private assets (private assets minus private liabilities).
Page 5


Y
ou have learnt about the reconstitution of a
partnership firm which takes place on account
of admission, retirement or death of a partner . In such
a situation while the existing partnership is dissolved,
the firm may continue under the same name if the
partners so decide. In other words, it results in the
dissolution of a partnership but not that of the firm.
According to Section 39 of the partnership Act 1932,
the dissolution of partnership between all the partners
of a firm is called the dissolution of the firm. That
means the Act recognises the difference in the
breaking of relationship between all the partners of a
firm and between some of the partners; and it is the
breaking or discontinuance of relationship between
all the partners which is termed as the dissolution of
partnership firm. This brings an end to the existence
of firm, and no business is transacted after
dissolution except the activities related to closing of
the firm as the affairs of the firm are to be wound up
by selling firm’s assets and paying its liabilities and
discharging the claims of the partners.
5.1  Dissolution of Partnership
As stated earlier dissolution of partnership changes
the existing relationship between partners but the
firm may continue its business as before. The
dissolution of partnership may take place in any of
the following ways:
(1) Change in existing profit sharing ratio among
partners;
(2) Admission of a new partner;
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
? State the meaning of
dissolution of
partnership firm;
? Differentiate between
dissolution of partner-
ship 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;
? Record journal entries
and prepare the
necessary ledger
accounts to close the
books of the firm and
settlement of partners’
claim.
Dissolution of Partnership Firm
5
227 Dissolution of Partnership Firm
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) Expiry of the period of partnership, if partnership is for a specific period
of time;
5.2  Dissolution of a firm
Dissolution of a partnership firm may take place without the intervention of
court or by the order of a court, in any of the ways specified later in this section.
It may be noted that dissolution of the firm necessarily brings in dissolution of
the partnership.
Dissolution of a firm takes place in any of the following ways:
1. Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.
2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner , become insolvent, rendering
them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners
to 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 the
declaration of war with his country and India.
3. On the happening of certain contingencies: Subject to contract between the
partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved
if any one of the partners gives a notice in writing to the other partners,
signifying his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a
partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties
as a partner;
(c) when a partner is guilty of misconduct which is likely to adversely affect
the business of the firm;
228 Accountancy – Not-for-Profit Organisation and Partnership Accounts
(d) when a partner persistently commits breach of partnership agreement;
(e) when a partner has transferred the whole of his interest in the firm to a
third party;
(f) when the business of the firm cannot be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and
equitable.
Distinction between Dissolution of Partnership and Dissolution of Firm
Basis Dissolution of Partnership Dissolution of Firm
1. Termination of The business is not The business of the firm is
business terminated. closed.
2. Settlement of Assets and liabilities are Assets are sold and
assets and revalued and new balance liabilities are paid-off.
liabilities sheet is drawn.
3. Court’s Court does not intervene A firm can be dissolved by
intervention because partnership is the court’s order.
dissolved by mutual
agreement.
4. Economic Economic relationship Economic relationship
relationship between the partners between the partners
continues though in comes to an end.
a changed form.
5. Closure of books Does not require because The books of account are
the business is not closed.
terminated.
6. Other dissolution It may or may not involve It necessarily involves
dissolution of the firm. dissolution of partnership.
Test your Understanding – I
State giving reasons, which of the following statements are true or false:
1. Dissolution of a partnership is different from dissolution of a firm,
2. A partnership is dissolved when there is a death of a partner,
3. A firm is dissolved when all partners give consent to it.
4. A firm is compulsorily dissolved when a partner decide to retire.
5. Dissolution of a firm necessarily involves dissolution of partnership.
6. A firm is compulsorily dissolved when all partners or when all except one partner
become involvent.
7. Court can order a firm to be dissolved when a partner becomes insane.
8. Dissolution of partnership can not take place without intervention of
the court.
229 Dissolution of Partnership Firm
5.3 Settlement of Accounts
In case of dissolution of a firm, the firm ceases to conduct business and has to
settle its accounts. For this purpose, it disposes off all its assets for satisfying all
the claims against it. In this context it should be noted that, subject to agreement
among the partners, the following rules as provided in Section 48 of the
Partnership Act 1932 shall apply.
(a) Treatment of Losses
Losses, including deficiencies of capital, shall be paid :
(i) first out of profits,
(ii) next out of capital of partners, and
(iii) lastly, if necessary, by the partners individually in their profits sharing ratio.
(b) Application of Assets
The assets of the firm, including any sum contributed by the partners to make
up deficiencies of capital, shall be applied in the following manner and order:
(i) In paying the debts of the firm to the third parties;
(ii) In paying each partner proportionately what is due to him/her from the
firm for advances as distinguished from capital (i.e. partner’ loan);
(iii) In paying to each partner proportionately what is due to him on account
of capital; and
(iv) the residue, if any, shall be divided among the partners in their profit
sharing ratio.
Thus, the amount realised from assets along with contribution from partners, if
required, shall be utilised first to pay off the outside liabilities of the firm such as
creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured
loans have precedence over the unsecured loans); the balance should be applied
to repay loans and advances made by the partners to the firm. (in case the
balance amount is not adequate enough to pay off such loans and advances,
they are to be paid propartionately); and surplus, if any is to be utilised in
settlement of the capital account balances, after adjusting all profits and losses.
Private Debts and Firm’s Debts: Where both the debts of the firm and private debts of
a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.
(a) The property of the firm shall be applied first in the payment of debts of the
firm and then the surplus, if any, shall be divided among the partners as
per their claims, which can be utilised for payment of their private liabilities.
(b) The private property of any partner shall be applied first in payment of
his private debts and the surplus, if any, may be utilised for payment of
the firm’s debts, in case the firm’s liabilities exceed the firm’s assets.
It may be noted that the private property of the partner does not include the
personal properties of his wife and children. Thus, if the assets of the firm are
not adequate enough to pay off firm’s liabilities, the partners have to contribute
out of their net private assets (private assets minus private liabilities).
230 Accountancy – Not-for-Profit Organisation and Partnership Accounts
Inability of a Partner to Contribute Towards Deficiency
In the context of settlement of accounts among the partners there is still another
important aspect to be noted, i.e., when a partner is unable to contribute towards
the deficiency of his capital account (the account finally showing a debit balance),
he/she is said to be insolvent, and the sum not recoverable is treated as capital loss
for the firm. In the absence of any agreement, to the contrary, such a capital loss is
to be borne by the remaining solvent partners in accordance with the principle laid
down in Garner vs. Murray case, which states that the solvent partners have to bear
such loss in the ratio of their capitals as on the date of dissolution. However, the
accounting treatment relating to dissolution of partnership on account of insolvency
of partners is not being taken up at this stage.
5.4 Accounting Treatment
When the firm is dissolved, its books of account are to be closed and the profit or
loss arising on realisation of its assets and discharge of liabilities is to be
computed. For this purpose, a Realisation Account is prepared to ascertain the
net effect (profit or loss) of realisation of assets and payment of liabilities which
may be is transferred to partner’s capital accounts in their profit sharing ratio.
Hence, all assets (other than cash in hand bank balance and fictitious assets, if
any), and all external liabilities are transferred to this account. It also records
the sale of assets, and payment of liabilities and realisation expenses. The balance
in this account is termed as profit or loss on realisation which is transferred to
partners’ capital accounts in thier profit sharing ratio (see figure 5.1)
Dr.  Realisation Account Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Assets : Liabilities :
Land and Building xxx Sundry creditors xxx
Plant and Machinery xxx Bills payables xxx
Furniture and Fittings xxx Bank overdraft xxx
Bills receivables xxx Outstanding expenses xxx
Sundry debtors xxx Provision for  doubtful debts xxx
Cash/Bank xxx Cash/Bank (sale of assets) xxx
(payment of liabilities) Partner’s capital account xxx
Cash/Bank xxx (assets taken by the partner)
(payment of unrecorded liabilities) Loss (transferred  to partners xxx
Partner’s capital account xxx capital accounts)
(liability assumed by the partner)
Profit (transferred to partners’ xxx
capital account in their profit
sharing ratio)
Total xxxxx Total xxxxx
Fig. 5.1: Format of Realisation Account
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